(Bloomberg) -- South Korean bulls are looking to the Federal Reserve’s interest-rate cuts to give the country’s stocks a bigger boost over emerging Asian peers.
Money managers at Causeway Capital Management and M&G Investments are among those expecting the won to gain momentum as the Fed eases, attracting foreign inflows in a market heavily swayed by global investors. As risk sentiment improves along with lower interest rates, bulls are also hoping the cheaper valuation of the country’s tech sector will lure back dip buyers.
The Kospi Index has risen less than 2% in 2024, lagging the 24% gain in Taiwan’s Taiex gauge and 14% in India’s Nifty 50 Index. The Korean benchmark’s underperformance has largely been driven by the country’s biggest stock, Samsung Electronics Co., whose shares are flat for the year as it struggles to grow its AI chip business.
“Korea should be positively impacted by a potentially weaker dollar,” said Arjun Jayaraman, a US-based portfolio manager at Causeway Capital Management. “Most bullish I would say Korea because it’s got China-like valuation without all the problems of China.”
The won has appreciated about 1.6% against the dollar since Aug. 14 as growing confidence over Fed rate cuts softened the greenback. That’s better performance than most emerging Asian peers.
Read: Crowded TSMC Trade Drives Funds to Cheaper AI Bets in Korea
Valuation is also on Korea’s side. While Taiwanese stocks have typically been boosted in the Fed easing cycle, investors see limited upside after the AI boom left the arena too crowded.
The Kospi Index trades at around nine times its forward estimated earnings, below the historical average and even cheaper than China’s beleaguered benchmark CSI 300. Taiwan’s Taiex is trading near a ratio of 17.
For Vikas Pershad, a portfolio manager at M&G Investments in Singapore, the Fed’s easing would have a “more pronounced positive impact” on the Korean stock market, given its heavy weighting on the tech sector that particularly benefits from lower borrowing costs.
Such optimism may prove wrong-footed if the Fed cuts less than expected or the US economy ends up in a recession, not the rosy soft-landing scenario the market is hoping for. The “cyclical characteristics” of Korean stocks prompted Citigroup Inc. strategists to downgrade the market to neutral earlier this month.
There’s also the risk that the won’s strength reaches a point that’s detrimental to the nation’s exports.
Still, a weaker dollar is more of “good news” as it means investors can shift focus to non-US assets, a boost to undervalued equities elsewhere, according to Baring Asset Management Korea.
Hyun Choi, Baring Asset’s head of equity in Seoul, expects the Kospi to reach 3,000 by the end of 2024, or about 11% above Wednesday’s close, led higher by Samsung Electronics.
--With assistance from Hooyeon Kim and Ashutosh Joshi.