South Korea has been one of the stronger Asian economies, successfully shrugging off last year's glo...
South Korea has been one of the stronger Asian economies, successfully shrugging off last year's global concerns of a recession. The economy has a strong domestic and property market owing to the easing of finance. However, as Korea is a cyclical economy, there are some concerns there might be overheating within the economy and the cycle might turn.
The Bank of Korea has increased interest rates to 25 basis points for fear of inflationary pressures. With the strengthening of the won to the dollar, it is unlikely another rate increase will follow.
The question remains whether Korea's industrial production will pick up quickly enough to precede the consumption and property boom. If it does not, then Koreans might find themselves with more credit debts than anticipated.
'The economy has picked up and we have seen a recovery in exports,' says Douglas Watt, investment manager of Far East equities at Britannic. 'Korea is a major producer of electronics, cars and steel ' cyclical sectors. Domestic economy growth has been positive and a growing desire for mobile phones and cars has fuelled consumer demand.
'Looking forward, we are cautious for the economy. We think electronics have not recovered yet and will suffer from pricing pressure. The domestic cycle has been strong for two to three years and has reached its peak and might fall. South Korea is vulnerable to the global economy and we remain unsure of an imminent global recovery.'
The falling US stock markets might adversely affect South Korea and damage its exports. Ted Pulling, fund manager of the JP Morgan Fleming Asia Fund, says: 'Few investors expect to see the sequential acceleration in US final demand in the second and third quarter of 2002 forecast three months ago. This more sober view of US economic prospects, reinforced lately by the anticipation of stronger negative wealth effects, is dragging Asia down as well, triggering a bout of profit taking, margin calls and defensive portfolio adjustments that have bitten hard into the first-half gainers like Korea.'
Unlike Watt, Pulling does not believe the Korean economy will be subject to overheating.
He says: 'According to almost all traditional measures of overheating ' prices, trade balance, wage pressures ' Korea does not have a major problem. Worries are focused on the pace of recovery in final demand and on consumer credit. Our view is that the consumer credit fears are overdone.
'Nevertheless, Korea certainly possesses the strongest cycle recovery in Asia, led by consumer demand that has in turn been fed by the rapid growth of the consumer finance industry, especially credit card debt. The Korean property market is booming, and consumer loan growth remains robust.'
fund manager comment: New Star
Wall Street's woes spilled over into Asia during the second quarter: the MSCI AC Pacific Free ex Japan Index fell nearly 7%, more than giving up its gains in the previous quarter, in dollar terms, but the markets were broadly flat as a result of the weakening dollar.
Although consensus earnings expectations are too high, liquidity is still buoyant and economic indicators point to recovery. The weaker dollar was also a positive factor but the region's equity markets finally succumbed to the bears as the US experienced the kind of post-credit boom torrent of accounting shams and over-leveraged corporate disasters with which Asian investors became familiar five years ago.
On valuation grounds, Asia is attractive relative to the US and Europe. The outlook remains the same ' albeit with increasing uncertainty about the region's ability to continue to decouple in the short term from troubles in the US. The ability for the region's financial asset prices to rise in absolute terms depends on the scale and speed of the bear market in US equities, corporate bonds and the dollar and the degree this affects the economy and East Asian exports.
Valuations, rising profitability and the domestic demand trends continue to look attractive in much of East Asia and continue to give credence to the possibility of an upswing in the credit cycle in the region and, with it, a bull market. Even if this does not occur, the downside appears limited given the valuation support, rising levels of profitability, and the fact the region is at the opposite end of the credit cycle with low levels of financial leverage.
So what about structural issues? Asia has gone through some tremendous structural changes since the crisis and shareholders of those companies that are well positioned for the ˜New Asia' have done well. Ian Beattie is Asian equity fund manager for New Star
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