South Korea Stocks Raised to ‘Overweight’ at JPMorgan

By Chen Shiyin

Feb. 27 (Bloomberg) -- South Korean stocks were raised to “overweight” at JPMorgan Chase & Co., which said a strengthening of the won will draw funds into the equity market.

Investors should hold more of the nation’s shares than are represented in Asian and global emerging market benchmark indexes, compared with an earlier rating of “underweight,” analysts led by Adrian Mowat, JPMorgan’s chief Asian and emerging markets strategist, wrote in a Feb. 26 report. The brokerage has a “trading target” of 1,250 for the Kospi index, 19 percent higher than yesterday’s close.

The Kospi has dropped 5.5 percent this year, adding to a 41 percent plunge in 2008, the first decline in six years. The index has lost 49 percent in U.S. dollar terms since August 2006, the month that JPMorgan first started rating the market “underweight.” That’s more than a 40 percent slump in the MSCI Asia-Pacific Index during the same period.

“The expectation of a reversal in the combination of short positions in the Korean won and the large consensus underweight in the equity market is driving our” recommendation, the analysts wrote. “This is a trading call as we continue to believe that structural issues with the Korea economy are likely to cap growth.”

The Kospi rose 0.8 percent today in Seoul trading, after gaining as much as 2.1 percent.

The won is at 1,540.70, after falling 39 percent in the past year, the worst performer among 10 Asian currencies tracked by Bloomberg. The currency may strengthen to 1,400 against the dollar by the end of March and climb to 1,200 by end-2009, JPMorgan forecast.

Contraction

The slump in the won so far comes as the government forecasts the economy to shrink about 2 percent this year, the first contraction since the Asian financial crisis a decade ago. Finance Minister Yoon Jeung Hyun this month pledged to increase stimulus spending, adding to 51 trillion won ($34 billion) already allocated to tax cuts and infrastructure spending.

“There are significant fundamental risks to our call,” the analysts wrote. “A high private sector debt to GDP ratio limits the effectiveness of monetary policy to stimulate growth; this results in the economy’s high dependence on external demand.”

SK Telecom Co., KT&G Corp., Samsung Fire & Marine Insurance Co., S-Oil Corp. and Samsung Heavy Industries Co. are among “defensive” companies recommended by JPMorgan, which said these companies offer liquidity earnings visibility and a sustained dividend.

Korea Electric Power Corp., South Korea’s biggest utility, and the nation’s banks, are also among companies that will benefit from a stronger won, the report said.

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net.