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Week in review: Small and mid caps regained edge

April 21, 2014 13:28|April 21, 2014 13:29
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- Last week, the Kospi rebounded to the 2,000pt mark. Expectations for China’s
economic stimulus were undermined as 1Q14 GDP growth reached 7.4%, but
concerns over a sharp economic slowdown eased as well. Better economic data in
the US sent the US market higher and easing tensions in the Ukraine also had a
favorable influence. Small-cap (+1.6%) and Kosdaq (+2.7%) shares gained an
edge over large caps. KRW/USD closed the week at W1,037.4, up W2.3 from a
week ago. Yields on three-year government bonds rose 2bp to 2.88%.

- Five-day cumulative net buying: Overseas investors extended a net buying
position in the spot market (+W450bn), but closed the week in a net selling
position in the futures market (-4,900 contracts). For domestic institutions,
pension/public funds showed slight net buying (+W27bn), whereas financial
investment institutions (-W235bn), investment trusts (-W124bn) and insurance
firms (-W65bn) stood as net sellers.

- Sectors/stocks: Shares of Enex (011090, +30.6%) and Hanssem (009240,
+13.9%) skyrocketed ahead of the scheduled implementation of vertical extension
remodeling on April 25. Despite potential share overhang from convertible bonds,
LG Innotek (011070, +11.0%) gained on expectations for continuing momentum
from camera modules and LED backlight units (BLU) for TVs. Shipbuilders, such
as Hyundai Mipo Dockyard (010620, -6.0%), Daewoo Shipbuilding & Marine
Engineering (042660, -5.0%) and Hyundai Heavy Industries (009540, -3.9%),
turned weaker due to low 1Q14 earnings expectations. NH Investment & Securities
(016420, +22.4%) surged ahead of its takeover of Woori Investment & Securities.

- Last week’s international events: The US and European stock markets closed on
Good Friday. Despite the Geneva agreement, tensions continued in the Ukraine as
pro-Russian separatists rejected the disarmament deal. On April 20, Korea’s
Ministry of Unification announced that it approved an April 24-28 trip to Pyongyang
by Choi Yeon-hye, CEO of Korea Railroad Corp. (KORAIL), and four other officials
for a meeting of the Organization for Co-operation between Railways (OSJD). The
point of interest is whether the visit will be a breakthrough in inter-Korean relations.

• Week ahead: Focus on KRW/USD
- Overall: A possible issue this week is whether the KRW/USD will go slip below
W1,000. We should consider an Overweight strategy for industries that benefit
from a strong KRW.
- IMF report: On the April 18 (Friday), the International Monetary Fund (IMF) said
that the Korean government should refrain from intervening in the FX market and
argued that the real effective exchange rate of the KRW is 8% undervalued
compared to the equilibrium rate of exchange. The IMF added that while Seoul’s
FX policy generally includes active market intervention, it tends to be even more
aggressive when the KRW appreciates. The Fund pointed out the Bank of Korea’s
forward exchange position surged 82% when the KRW strengthened from October
2012 through May 2013. If the currency appreciates 8%, the KRW/USD should fall
to W950.
- Bank of Japan: In an interview with The Wall Street Journal, Nobuyuki Nakahara,
former member of the Policy Board of the Bank of Japan, argued that, considering
the three rounds of quantitative easing by the US Federal Reserve Board, its
central bank should consider a second round (worth JPY100tn) until the nation’s
inflation reaches the targeted 2%.
- If the KRW/USD falls again to the W1,030 level seen in early-April and the
JPY/USD rises to JPY103, the KRW/JPY100 should dip to the W1,000 mark, a
five-year low. Although conditions would be much different between 2013 and
2014 given cyclical variables, such as new product launches, related sector
indexes could respond sensitively if the key level is touched. We call for caution
against autos and IT over the short term.
- Global funds flow: Emerging market equity funds had net money inflows for a
third week. Net inflows to emerging markets (Asia ex-Japan, Global Emerging)
amounted to USD1.86bn compared to USD580mn going to advanced markets
(International, Pacific). In contrast, Korea-related in Asia ex-Japan funds saw a net
outflow for a third straight week. As such, Korea’s relative momentum to the
emerging markets has weakened.
- Week ahead: Major European stock markets such as those in the UK, Germany
and France will close on Easter Monday. This week, US housing indicators,
durable goods orders and major corporations’ earnings are scheduled to be
released. Last week, Google shares pulled back sharply after releasing
disappointing results. As such, earnings releases by tech shares need to be
closely monitored from Netflix (Monday), Apple and Facebook (both Wednesday).
*Source:Korea Investment & Securities Co.
*Pls refer to the attached file for details.