Bloomberg News

South Korea’s Biggest Investor Bought Stocks After Kim’s Death

December 28, 2011

Dec. 20 (Bloomberg) -- South Korea’s National Pension Service, the nation’s biggest investor, bought stocks yesterday when the Kospi index fell the most in more than five weeks following the death of North Korean leader Kim Jong Il.

National Pension doesn’t see further steep declines in equities, Kim Hee Seok, head of the fund’s investment-strategy division, said by phone today. KB Asset Management Co., a unit of South Korea’s second-largest financial services group, is buying futures on the nation’s bonds, betting losses after Kim’s death won’t last. Stocks may become attractive if they fall further on geopolitical risk, according to Franklin Templeton Investment Trust Management Co. in Seoul.

South Korean equities and bonds rallied today after tumbling yesterday on concern a power struggle may erupt in the communist North after Kim died on Dec. 17. A government statement called on North Koreans to “loyally follow” his son Kim Jong Un after saying the nation’s leader died from exhaustion brought on by a sudden illness while on a domestic train trip.

“While I think the chances of serious unrest in North Korea are pretty slim, there could be small noises sporadically during the succession process, which should present bargain- hunting opportunities,” said Kim from the National Pension, which is overseen by South Korea’s health ministry.

He declined to comment on what stocks the fund, which had 345 trillion won ($296 billion) in assets as of October, bought yesterday.

The Kospi index, which sank 3.4 percent yesterday, gained 0.9 percent as of the close in Seoul today. The gauge trades at 9.8 times estimated profit, the third-lowest valuation among primary indexes in Asia after Pakistan and Vietnam, according to data compiled by Bloomberg. That compares with a 12.4 multiple for the MSCI Asia Pacific Index.

Discount Valuation

“South Korea has already been trading at a discount to other peers in part because of geopolitical risks,” said Oh Sung Sik, chief investment officer for equities at Franklin Templeton in Seoul, which manages about $4.7 billion. “If the market extends losses only because of Kim Jong Il’s death, that will present a buying opportunity and I would feel like adding more.”

KB Asset purchased three- and 10-year bond futures yesterday after prices on the debt slid to seven-week lows, according to Moon Donghoon, who oversees 11 trillion won as the company’s managing director of fixed-income.

“We don’t think Kim’s death will push South Korean markets into chaos as it’s not as if the North will start a war against the South,” KB Asset’s Moon said by phone yesterday.

Nuclear Weapons

South Korea pledged steps by the central bank if needed to stabilize financial markets, and called in police officers for emergency duty while keeping the alert level for the military. Under Kim’s 17-year rule, North Korea built nuclear weapons while about 2 million of its people died when famine struck in the 1990s. The United Nations said in October North Korea won’t be able to feed its own people for the foreseeable future.

The won strengthened 1.1 percent to 1,162.18 per dollar today, after dropping 1.4 percent yesterday. The yield on South Korea’s benchmark three-year bonds fell seven basis points to 3.38 percent, after climbing 12 basis points to 3.45 percent yesterday, Korea Exchange prices show.

The Kospi 200 Volatility Index, which measures the volatility of options tied to the Kospi 200 Index, fell 4.7 percent to 26.67. It jumped 10 percent yesterday, the most in five weeks, to 27.98.

Bond Purchases

National Agricultural Cooperative Federation, South Korea’s second-biggest bondholder, and Korea Life Insurance Co., the nation’s second-largest life insurer, said they plan to add government bonds after yields increased.

“When Kim Jong Il’s father, Kim Il Sung, died, financial markets came back to normal after a few days,” Kim Sun Je, vice president of the separate account department at Korea Life in Seoul, said by phone yesterday. “I plan to wait for a few days and add bond holdings if 10-year yields rise to 4 percent.”

The Kospi fell 0.8 percent on July 11, 1994, the first trading day after North Korea announced the elder Kim’s death. The gauge advanced 18 percent in the next four months.

“Investors shouldn’t be too panicky,” Jeon Jeong Woo, a fund manager at Seoul-based Samsung Asset Management Co., which oversees the equivalent of about $90 billion as South Korea’s biggest asset management company, said in an interview. “History tells us that the impact of geopolitical risks on markets was short-lived, and I believe this time will be similar.”

‘Smooth Succession’

Kim Jong Il’s death isn’t a “ratings trigger in itself,” said Andrew Colquhoun, Hong Kong-based head of Asia-Pacific sovereigns for Fitch Ratings, in an e-mailed statement.

Standard & Poor’s sees no impact on South Korea’s ratings provided there’s a “smooth succession,” said Kim Eng Tan, an S&P analyst in Singapore, in an interview.

“Investors in South Korean bonds are aware of North Korean risks and have put money in regardless,” said Chung Bong Hyun, who oversees 30 trillion won of assets as head of the capital trading and investment department at National Agricultural in Seoul. “We know that the status of Kim Jong Il’s son, Kim Jong Un, isn’t stable, but view market volatility as a profit-making opportunity.”

--With assistance from Brendan Murray in Sydney. Editors: Darren Boey, Sandy Hendry

To contact the reporters on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Darren Boey at dboey@bloomberg.net


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