Kospi Target Is Cut 15% by UBS on Economic Slowdown

By Kyung Bok Cho

Aug. 21 (Bloomberg) -- South Korean stocks will rise less than forecast as global economic growth slows, UBS AG said, paring its one-year forecast for the Kospi index by 15 percent.

The South Korean benchmark index's mid-2009 target was cut to 1,700, UBS's Seoul-based analysts Young Chang and Edward Yoon wrote in a report released today. They had forecast a level of 2,000 by the end of 2008. The Kospi fell for a fourth day, by 1.8 percent to 1,512.59. It's slumped 20 percent this year.

South Korea's expansion has slowed to the weakest pace since the start of 2007 as the global economy cooled and consumer prices jumped. Corporate profit growth in the country, which relies on exports for two-fifth of its economy, may plunge to 3 percent in the third quarter from 9 percent in the second, the UBS report said.

Investors should avoid chipmakers and liquid-crystal display makers because of ``weak macro demand,'' the analysts wrote. It's also ``too early'' to buy construction stocks because ``major housing deregulation looks politically difficult'' and ``demand shows no signs of recovery,'' the brokerage said.

Posco, Asia's third-largest steelmaker, is recommended because of better-than-expected second-quarter earnings, UBS said. The brokerage also advised clients to buy banks, automakers including Hyundai Motor Co., the nation's biggest carmaker, consumer stocks such as Hite Brewery Co., South Korea's largest beermaker, and LG Telecom Ltd.

`Sell KT&G'

KT&G Corp., South Korea's biggest tobacco company, has become expensive after outperforming the Kospi in the past three months, UBS said. In that time, the company's shares rose 5.9 percent, while the index dropped 18 percent.

The index is unlikely to drop below 1,500 as that would take its price-earnings ratio to a ``recession level'' of 10 times, the low point during the 1991 U.S. recession. Furthermore, the National Pension Service of Korea may invest as much as 9 trillion won ($8.5 billion) in stocks in the second half of 2008 and is bound to buy when equities fall, the analysts said.

Increases in the benchmark index will be limited because of the slowdown in the U.S., Europe, South Korea and ``perhaps China's as well,'' they said.

To contact the reporter for this story: Kyung Bok Cho in Seoul at kcho7@bloomberg.net