December Korea Equity Market Review
By Seongin Jeong, Senior Market Manager at Korea Investment Management, portfolio manager of the AdvisorShares KIM Korea Equity ETF (Ticker: KOR)
In December 2017, global financial markets were relatively generous toward risk assets. Along with a benchmark interest rate increase, the US Fed revised up its economic forecast but voiced concern about a prolonged period of low inflation and reconfirmed its steady rate hike stance. And with the US Senate recently passing the tax reform bill that fueled expectations for bigger corporate earnings, the US stock market stayed on an upward track.
However, the Korean stock market experienced a correction due to 1) worries about slower 4Q17 earnings mainly for export-driven stocks triggered by sharp KRW appreciation, 2) seasonal factors for the domestic stock market (issues related to avoiding the capital gains tax on stock transactions), 3) major shipbuilders such as Hyundai Heavy Industries and Samsung Heavy Industries announcing massive rights offers and 4) lingering uncertainties about whether Korea-China relations would improve.
The Kospi and Kosdaq took divergent paths again in December following November. While the Kospi fell 0.36% in December, the Kosdaq went up 3.5%. The Kospi gave a poor performance as foreign investors continued to short the domestic semiconductors sector. In contrast, the Kosdaq was bullish with money flowing in on hopes for government measures to boost SMEs and the Kosdaq (offering tax breaks for investing in Kosdaq-listed firms, easing listing and M&A requirements, announcing a new benchmark index, etc.).
On the Kospi, the main gainers were pharmaceuticals (+6.1%), services (+3.6%), construction (+1.4%) and machinery (+1.0%) while the major losers were transport equipment (-7.8%), non-ferrous metals (-6.3%), transportation/storage (-4.9%) and textiles/apparel (-3.7%). Specifically, the pharmaceuticals sector was driven by mounting hopes for promising 2018 clinical trial results among major biotech players. In contrast, transport equipment pulled back due to earnings erosion concerns and capital raising issues for shipbuilders.
Global economic conditions are favorable and thus, Korea’s exports remain brisk while corporate earnings continue to be revised up. As such, we believe the Korean stock market will resume growth in January rather than experience further a retreat. Although the 4Q17 earnings should slightly miss estimates as one-off costs are mostly booked in the last quarter, share prices are unlikely to show increased sensitivity to profits. Rather, with the 2018 earnings receiving upward revisions, the Kospi’s 12MF PE has fallen to as low as 9.1x (three-year-trailing avg. is 10.4x), which means the index has sufficiently pulled back. Moreover, the Kospi’s 12MF PB 1x, which has acted as the market’s rock-bottom level, stands at 2,400pt, offering very strong downside protection.
Meanwhile, the earnings improvement trend is spreading from large-caps to small/mid-caps. And with the government expected to announce measures in January to promote SMEs and the Kosdaq, we believe small/mid-caps will continue to be relatively more bullish.
The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.