Currently we do not have any exposure to South Korean debt, this is due to relative value rather than concerns over the nation’s financial situation. Korea is indeed a four star country under Stratton Street’s Net Foreign Asset (NFA) scoring system and our estimates suggest that by 2019 Korea should actually improve to a five star ranking.
The benchmark interest rate at 1.5%, although at a record low, is still high when compared to other countries and leaves room for the Bank of Korea (BoK) to ease again at their meeting tomorrow, 19th April. In fact the ruling Saenuri party has called on the central bank to adopt more aggressive policies including issuance of more debt to help the ailing economy. The government’s target for GDP for 2016 is 3.1% but this maybe unobtainable if the current trajectory for growth is maintained, and the IMF has just lowered their forecast to 2.7% from their previous 3.2% estimate.
The problem for South Korea is the falling export market; exports have fallen for 15 consecutive months leading to a rise in household debt and unemployment, the highest in six years. Even with this Korea’s current account surplus was $105.96bn last year, the most since BoK records began back in 1980; because as exports fell, imports dropped from sight.
So back to the bond market, the benchmark 10-year Korean government bond denominated in US dollars trade at a spread around 50bps over US Treasuries which for its AA2/AA- rating is below our Relative Value Model fair value target of around 70bps. This could be because Korea is a strong credit and at the moment tensions with their northern neighbours are somewhat subdued.
Previously held Korean quasi-government issues are also trading close to fair value with issues such as Korea Export-Import Bank 5% maturing 2022 priced at a spread of ~80bps over, very close to our fair value spread of 61bps. At the longer end of the maturity spectrum there also appears very little to go for with issues such as Korea Gas Corp 2042s at a spread of 100bps against fair value of 86bps.
These issues just do not currently offer much in the way of expected return compared with current portfolio holdings. However, should Korea’s pricing change or indeed our currently held bonds outperform by a huge margin, we could once again see Korean names appearing on our list of attractive investments.
And finally, the chap that invented predictive text has died; his Funfare is on Monkey 25th.