South Korea's Won Keeps Rising
Major South Korean exporters all got a nice boost from the weakness of the country's currency in the past two years. Even as rivals swam in red ink, companies such as Samsung Electronics and Hyundai Motor enjoyed a clear edge over Japanese rivals such as Sony (SNE) and Toyota (TM), posting record earnings this fall. But with the Korean won gaining strength, will Korean exporters begin to lose some of the market share they accumulated in the past year? "I don't think a shift in currency movement will have any major impact," says Ahn Young Hoe, chief investment officer at fund manager KTB Asset Management, summing up a growing perception among investors, industrial analysts, and economists. Ahn and many other investors expect the won to strengthen against the dollar by another 10% by the end of next year, after gaining 7.7% in the past six months—Asia's best performing currency, except for the Japan's yen. Yet they also forecast fat profits for Samsung, Hyundai, and many other exporters. Why is an appreciating won not hurting the Koreans? The expectation is that the won's rise will be slow and gradual as the global economy and demand picks up. The won remains some 20% below its yearend 2007 level. Perhaps more important, the yen remains extremely strong and has stayed more or less flat in the past six months against the won. When compared with the yearend 2007 yen-won exchange rate, the won has lost more than a third of its value against the yen. Hyundai: greater profit in 2010The won's continuing advantage over the yen gives Korean exporters a lot of wiggle room. As formidable Japanese rivals such as Sony, Toyota, and Nissan (NSANY) are weighed down by the strong yen, Korean exporters can afford to push ahead with aggressive marketing campaigns to keep or even expand market share in the global arena. "What's most important for the Koreans is the won's strength against the yen, not the dollar," says corporate analyst Michael Sohn at Woori Investment & Securities. Take Hyundai. Suh Sung Moon, who follows Hyundai for brokerage Korea Investment & Securities, expects the automaker to report a better profit next year after posting a record net profit of $2.36 billion this year, nearly double 2008's $1.2 billion. He estimates that the won's average exchange rate next year will be around 1,100 to the dollar, up from the current level of 1,166, but still 13% weaker than the 2006 average of 955 and 15.5% weaker than the 2007 average of 929. Hyundai spokesman Oles Gadacz says his company is confident that it will have a better year in 2010 than this year, although sales and other targets have yet to be set. In a way, the Korean currency's strength in 2006 and 2007 is proving to have been a blessing. Auto analysts point out that new models being introduced now were designed and engineered two years ago to keep the company in the black even if the won strengthened to 900 to the dollar. "The 1,100 level doesn't appear to be unfavorable at all," Suh says. Woori's Sohn figures that about 36% of Hyundai's 2010 lineup will benefit from the cost-cutting intiatives of 2006 and 2007. IMF: Korean growth third among top 15More important, exporters will benefit from a global economic recovery that will increase demand for cars, electronic gadgets, and other products. Brokerage HI Investment & Securities forecasts Korean memory chip makers Samsung and Hynix Semiconductor will have significantly better financial health next year because of rising chip prices. HI projects that Samsung's operating profit will jump 45% to $13.8 billion next year. Such optimism is reflected by recent upward revisions in growth projections for Korea. Earlier this month, the Bank of Korea said it believes Korea's gross domestic product will grow by 4.6% in 2010, faster than the central bank's July forecast of 3.6%. (This year's estimated expansion was 0.2%). And the International Monetary Fund, which improved its 2010 growth projection for Korea by almost a full percentage point, to 4.5%, said that in the next two years, Korea would be the third-fastest growing country among the world's top 15 economies, after China and India.