Korea’s Covered Election Campaign Glory

Korean shares continued as mid-pack Asian performers into the final presidential election swing as the independent candidate withdrew in favor of the opposition with both contenders preaching “economic democratization” to reduce chaebol power and boost small business. Regional corporate bond leadership was lauded by the ADB in its quarterly update showing local currency issues outstanding at $6.2 trillion as a covered bonds law went before parliament after pilot transactions by state banks backed by mortgage and credit card receivables. It dictates 105 percent face value guarantee by the asset pool, as the central bank moves to establish one-third of mortgages as fixed-rate by mid-decade to remedy the heavy household debt burden. The interest rate easing bias is slated into next year with electronics exports picking up in Q3 on GDP growth of 2-3 percent. A part of the projected fiscal surplus may go for consumption and infrastructure stimulus as the 2013 government intends to tilt contract and policy support to non-chaebol firms which have enjoyed a run both on the main stock exchange and Kosdaq in response. Both the major parties promise to untangle cross-shareholdings and bar the conglomerates from traditional shop competition. The securities regulator has warned retail investors of “overheating” in tiny illiquid listings relying on “political themes.” Local brokers also advocate diversification into foreign stocks with allocation doubling to almost $50 billion in the latest quarter. Long-short positions in tech companies are a common strategy juxtaposing domestic and overseas giants. The National Pension System with $330 billion under management has a medium-term target for international exposure at one-fifth its portfolio as it registered a measly 2.3 percent return in 2011. For bonds the goal is 10 percent as currency appreciation is sought beyond the won brushing the 1100/dollar handle. With a 5 percent uptick against the greenback despite intervention banks have come under investigation for possible breach of forward limits.

With this pressure alongside withholding tax, foreign investors have pared Treasury bond ownership to 10 percent of the total. Moody’s dismissed the crackdown in an overall positive banking sector assessment after stress-testing. The tier-one average capital ratio tops 10 percent but personal and corporate credit troubles could test the regulatory threshold while not impairing confidence, the agency suggested. With chaebol reform in particular loosening the chokehold of founding families and North Korea turned quietly with its own transition, the traditional valuation discount could ebb in the near future more generally, many commentators argue. On the nuclear worry, fund managers point out far more volatile conditions in Pakistan where the MSCI index is up 20 percent and external bonds have rallied in the absence of a reprised IMF program. Into its own imminent poll, energy shortages are widespread as the central bank covers the 6.5 percent of GDP fiscal gap and US defense and aid cooperation breaks from past glory days.