KOREA - Current weakness in the Korean markets is providing investors with several attractive long-term opportunities - but only if the war against Iraq reaches a swift resolution.
The news comes as Seoul looks to lift restrictions on foreign investors seeking to do business in the area, according to reports.
The Korean stock market has fallen in recent months, largely due to weaker demand for Korea’s exports and flagging domestic demand.
The US-lead conflict against Iraq has also exacerbated already stronger oil prices, with a depressing effect on global growth. Potential conflict with North Korea and Iran is also making investors more risk-averse.
Schroders says that it expects global uncertainties to rock stock markets in the short term, but if the conflict with Iraq can be resolved quickly oil prices will weaken and reverse the current headwind to the global economy.
“As the year progresses, the impact of the monetary and fiscal boosting measures should begin to have positive influences on the global economy and on capital markets,” said Schroders.
“Domestically, there is ample room for the authorities to cut interest rates and support growth through fiscal measures. Confidence in the financial system should also return as the economy is far stronger than at the time of the 1997/98 crisis. Thus once the uncertainties clear economic influences are likely to turn positive, [allowing] Korea’s markets to recover.”
As one way of boosting the local economy, the Korean Ministry of Finance and Economy said that the government will provide financial assistance for foreign investors while easing investment restrictions in Seoul and neighbouring Kyonggi Province to attract more investment in the regions. Dutch company LG Philips is likely to become the first beneficiary of the plan as it awaits approval for the construction of a factory in Paju, northern Kyonggi Province.
Richard Firth, fund manager at Schroders, said: “[We] focus on companies that represent the bright longer term growth potential of certain sectors of the Korean economy. These include the service sectors and a number of companies listed on the KOSDAQ market.”
Schroders highlighted improvements in corporate governance standards as another factor in favour of Korean profitability. The news ties in with government plans to launch a task force of 100 government officials and experts in April to explore ways to curb conglomerates control of financial services companies. It also plans to introduce corporate pension funds as soon as possible, while providing tax cuts to long-term indirect investment vehicles.
“[But] some time may need to pass before the markets become more acquainted with the new government’s approach to the economy,” said Schroders.
“In the very short term it is difficult to accurately predict the exact bottom level for the markets.”
Schroders currently manages £1.8bn in retail and institutional assets across both Korean equities and bonds. The firm has a total of £88.3bn under management worldwide.
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