However, there has been an even greater rise in small-cap shares as the Kospi Small Cap index has seen a sensational rise of 97 per cent year-to-date. Even taking account of this extraordinary rise, we still remain positive about the prospects for the market as macro economic fundamentals are supportive and there remain opportunities for the stock picker looking for growth and value.
The Korean economy is showing signs of increasing domestic activity; credit card usage is recovering and service activity has been strong, with the expanding range of financial products leading activity higher. There have been encouraging results from the banks, which have exceeded analysts’ expectations, as loan growth has been stronger than anticipated across all parts of their loan books.
Service sector data has confirmed relatively low levels of growth in restaurants, hotels and some sectors within retail, but this is compared with strong department store and discount store sales. This seems to confirm our long-held view that listed, equity financed companies in the service sector are continuing to increase their dominance of the market.
Consumer confidence has continued to improve, led by the wealthier two segments of society, no doubt buoyed by gains in real estate and the stock market. We continue to think that prospects for continued local investment in the Korean equity market look good, confirmed by a recent local survey suggesting that investors are considering a large move out of real estate toward the stock market. In September alone W6500bn flowed into equity type funds.
The Korean export machine continues to power along with exports rising 13.4 per cent, while imports rose 11.6 per cent during October. Notably, this left a trade surplus of $2.93bn, the highest since January this year.
Inflation remained constrained at 2.5 per cent year-on-year in September. Despite this, the Bank of Korea increased call rates by 0.25 per cent to 3.5 per cent in October We note the Korean five-year treasury ended October at 5.26 per cent (vs. 3.9 per cent at the end of May) and see no reason for the BOK to tighten aggressively from here.
Local funds in Korea should continue to flow to institutions, and some sectors, particularly the finance sector, should continue to attract investment, as earnings remain better than expected.
James Cameron, fund adviser to the Atlantis Korea Opportunities Fund, Atlantis Investment Management.
