EM opportunities in Korea - BBH

Analysts at Brown Brothers Harriman looked into the investment opportunities in Korea.

Key Quotes:

"The won has generally outperformed within EM.  In 2015, KRW lost -6% vs. USD.  This trailed only the best performers TWD (-4%), CNY (-4%), INR (-5%), and PHP (-5%).  So far this year, KRW is up 6% YTD and is lagging only the best performers BRL (+25%), RUB (+14%), ZAR (+14%), CLP (+8%), MYR (+6%), and COP (+6%).  Our EM FX model shows the won to have VERY STRONG fundamentals, so this year’s outperformance is to be expected.

USD/KRW is making new lows in August, trading at levels not seen since mid-2015.  Break below the June 2015 low near 1100 would set up a test of the April 2015 low near 1065.

Korean equities have underperformed this year after outperforming in 2015.  Last year, MSCI Korea was -2% while MSCI EM was -17%.  So far in 2016, MSCI Korea is up 6% YTD and compares to +12% YTD for MSCI EM.  This underperformance should ebb a bit, as our EM Equity model has Korea at a VERY OVERWEIGHT position.  

Korean bonds have outperformed this year.  The yield on 10-year local currency government bonds is about -65 bp YTD.  This is behind only Brazil (-465 bp), Indonesia (-183 bp), Russia (-127 bp), South Africa (-120 bp), Colombia (-102 bp), and Turkey (-96 bp) and.  With inflation likely to remain low and the central bank likely to cut again, we think Korean bonds will continue outperforming.  

S&P just upgraded Korea a notch to AA with a stable outlook.  This is right where our own ratings model puts it.  The move also matches Moody's, which upgraded Korea to Aa2 back in December.  Fitch now lags with its AA- rating."