The Daily Update - Moon's 100 Days

With North Korea flexing its muscles, the first 100 days in office for South Korean President, Moon Jae-in have been testing. Despite the obvious distractions, Moon’s administration has already driven forth with some election promises, including a shift to an ‘income-led economy’; by way of introducing his five-year economic policy blueprint to address income inequality and encourage job creation. The presidential administration has also: had a supplementary budget (KRW 11.03tn) approved, introduced further policies to tackle speculative activities in the housing sector (including tightening mortgage rules), and unveiled a tax overhaul proposal.

 

High up on Moon’s agenda, the government has proposed an increase in taxes on high-earning individuals and dominant conglomerates, in favour of promoting smaller companies and public sector expansion. If these changes are agreed by parliament (the presidential party holds minority seats), this will be the country’s first increase in corporate tax since 1991. The news has not been taken as well as his ‘left-leaning’ party may have expected; after Moon was elected the country’s KOSPI Index continued its rally to all-time highs, however, since the tax proposal was announced the index has dipped 1.60%; although it is still up over 26% year-to-date. The Korean won, however, has remained relatively stable against the dollar in the aftermath.

 

According to our most recent calculations, South Korea has been upgraded to a 5 star NFA score this year (from 4 star); as we calculate its net foreign assets to GDP are above 25%. As our cut off is 3 stars (for investment grade strategies), South Korea is very much in our investable universe, and we have previously held positions from the region’s highly-rated issuers. However, as most readers are well aware, we currently do not hold any positions in the country as most bonds are trading relatively tight, with others priced expensively; according to our proprietary valuation model. A good example could be the sovereign’s 4.125% 2044 issue, which is trading at a yield of 3% and spread of 25bps over US Treasuries, whilst similarly rated bonds with a duration of ~17 years trade at 55bps, indicating it’s 3.5 notches expensive. Qatar sovereign 4.625% 2046s, rated Aa2, on the other hand trades at 155bps over, and offers over 5 notches of credit cushion.

 

With the current geopolitical events unfolding in the Korean region, some of the nation’s issuers have cheapened up of late and therefore look more attractive to us; especially for Aa2 rated credits. We will continue to monitor the political situation and attractiveness of holdings factoring in, as per usual, sufficient spread cushion to compensate for any potential risk.