Following the Bank of Korea’s decision to cut its interest rate, Stephen Cohen, Chief Investment Strategist for BlackRock International Fixed Income and iShares EMEA, comments on why the current monetary policy stance and latest reform announcements are positive for Korean stocks.
“On Thursday, the Bank of Korea cut interest rates by 25 bps to 2.5%. The rate cut had been well priced in, to the extent that the Korean won has actually strengthened following the news. While Governor Lee did not signal the need for further easing, should growth weaken further especially on the domestic front, another rate cut this year is not off the table. The Finance Minister welcomed the central bank rate cut, as it follows a pro-growth expansionary approach from the government. This coordinated approach should help support domestic demand, which has been weak.
“The government has also released details of dividend tax cuts on August 6. While the legislation is still contingent on passing in parliament in Autumn, dividend decisions from companies could be influenced as soon as this year. This is significant because Korean companies historically have had low dividend pay-out ratios, and the change in government policy may mean a need to raise dividends significantly to meet the eligibility for dividend tax cuts.
“Earnings have shown signs of bottoming out with an average miss of 12% year to date. This is an improvement on the 25% miss over the previous nine quarters. Consensus earnings growth for 2014 now stands at 13.1% which is stronger than 10.2% for emerging Asia and 7.4% for emerging markets. Having said that, Samsung, the largest constituent of the equity market, poses a risk as it struggles to compete in the smartphone market.
“The Bank’s easing stance combined with the government’s expansionary policy have helped stall the Korean won’s strengthening trend and have boosted momentum, reflected in the pickup in equity ETP inflows. We expect this momentum to continue and reiterate our positive view on Korean equities.”
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