With an interest rate cut and dividend regulation reform the attractiveness to international investors of the nation’s companies should be boosted, fixed income chief strategist Stephen Cohen said.
“On Thursday, the Bank of Korea cut interest rates by 25 bps to 2.5%, the cut had been well priced in, to the extent that the Korean won has actually strengthened following the news,” Cohen said.
“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,” he added.
Cohen said Korea’s Finance Minister has welcomed the central bank rate cut, as it follows a pro-growth expansionary approach from the government and coordination of monetary and fiscal policy should boost domestic demand, which has been weak.
Korea’s government also announced dividend tax cuts on 6 August and while the legislation is yet to pass in parliament, dividend decisions from companies could be influenced as soon as this year in Cohen’s view.
With Korean companies historically have had low dividend pay-out ratios the new rules may mean many have to raise dividends significantly to meet the eligibility for the tax cuts, he explained.
Earnings being poste by Korean companies are still weak but the trend is one of improvement with an average miss of 12% this year versus 25% over the previous nine quarters.
Consensus earnings growth for 2014 is now 13.1% which compares favourably to 10.2% for emerging Asia and 7.4% for emerging markets, Cohen said.
“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,” he added.
