Bloomberg News

Won Drop No Problem for Templeton on Korea Manufacturing Bet

May 29, 2012

Containers are stacked at the Port of Busan in Busan, South Korea. Exports contracted for a second month in April partly due to delayed resolution of the European debt crisis. Photographer: SeongJoon Cho/Bloomberg

Containers are stacked at the Port of Busan in Busan, South Korea. Exports contracted for a second month in April partly due to delayed resolution of the European debt crisis. Photographer: SeongJoon Cho/Bloomberg

Franklin Templeton Investments, the biggest overseas owner of South Korean bonds, remains “positive” on the country, betting the manufacturing industry will hold up as the currency weakens, a local executive said.

“Korea has a strong manufacturing base with rising global recognition and competitiveness, so even if the currency weakens, it rebounds quickly as manufacturers boost exports,” Kim Dong Il, who manages 3 trillion won ($2.6 billion) as the Seoul-based chief investment officer for fixed income at Franklin Templeton Investment Trust Management Co., said in a telephone interview on May 24. “We hold our positive view on South Korea.”

The nation faces its biggest maturity of debt next month since December 2010 and a central bank report today showed South Korean manufacturers’ confidence fell from a 9-month high in June. Templeton’s Global Bond Fund (TEMGINI) in Luxembourg had South Korean bonds as its top holding as of April 30, comprising 16 percent of $43 billion of assets, and held $1.9 billion of the government’s 4 percent security due June 2012. That bond makes up 19 percent of the 11.8 trillion won in sovereign notes maturing next month.

South Korea’s government is monitoring markets and pledging action to avoid capital withdrawals that wracked the country during the subprime mortgage crisis in 2008, when the won fell 26 percent against the dollar. The currency has weakened 3.8 percent in May, touching a seven-month low on May 25, as concern mounts that a deepening debt crisis in Europe may crimp demand for the nation’s exports and slow growth.

Growing Uncertainty

“With overseas uncertainties growing, we’re closely monitoring foreign investors’ movements,” Kim Jin Myung, director of treasury bureau at the Finance Ministry, said in a telephone interview on May 24. “We expect overseas funds to buy other Korean bonds like central bank notes and agency debt after sovereign notes mature, rather than pull out of the nation.”

Foreign investors held 17.8 percent of outstanding government debt at the end of 2011, more than double the ratio in 2008, official figures showed. Templeton was the largest holder based on regulatory filings compiled by Bloomberg. The won strengthened 0.9 percent today to 1,174.82 per dollar from May 25, after weakening 1.1 percent last week. Markets were closed yesterday for a public holiday.

Templeton’s Kim declined to comment on future investment plans.

Closely Watched

“It’s an issue in the market what Templeton, one of the major foreign investors in Korea, will do after receiving their money as it will show their view on the nation,” said Hong Jung Hye, a Seoul-based fixed-income analyst at Shinyoung Securities Co. “Their investments are closely watched by local and overseas investors, and if they don’t reinvest and pull out, it will also affect the exchange rate.”

South Korea issued more government debt in 2009 than previous years to tackle the global financial crisis. Sales were concentrated in three- and five-year bonds as shorter tenors were easier to issue, resulting in an increase in debt maturing between 2012 and 2014, the Finance Ministry said in a statement released in December. A total of 43.4 trillion won of sovereign bonds mature this year, nearly double the amount of 2011, the statement showed.

Fitch Ratings upgraded the outlook for the nation’s long- term foreign currency rating last year to “positive” and affirmed its A+ grade. The ratings company lowered Japan’s ranking this month to A+ with a negative outlook.

Re-enter Korea

South Korea’s economy expanded 0.9 percent in the first quarter this year from the previous three months, the fastest pace in a year, while inflation cooled to a 21-month low of 2.5 percent in April, official figures show. Exports contracted for a second month in April partly due to delayed resolution of the European debt crisis, the government said in a statement this month.

“Investor exits are possible in the current climate, as they seek the safety of the U.S. dollar,” Wai Ho Leong, a Singapore-based senior regional economist at Barclays Plc, wrote in an e-mailed response. Once the fear starts to ebb, he said, foreign investors will re-enter Korea quickly, taking advantage of its solid fundamentals and attractive exchange rate.

To contact the reporters on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net; Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Paul Panckhurst at ppanckhurst@bloomberg.net


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