South Korean stocks ride 'Goldilocks' tide
Impact from planned tax hike? Limited
KEIICHIRO MORIYASU, NQN staff writer
HONG KONG -- South Korean stocks are reaching record highs, as companies become less dependent on China and the U.S.
The benchmark Korea Composite Stock Price Index in July rose for an eighth consecutive month, its longest winning streak since the 1997 Asian currency crisis.
"Strong global growth and low inflation equals a Goldilocks environment for equities," said Ajay Kapur, head of Asia Pacific and emerging market equities research at Bank of America Merrill Lynch.
Although the global economy is picking up, U.S. interest rates and the dollar are sluggish due to waning expectations for the Donald Trump administration. As a result, investors are more likely to put their money into Asian stocks that promise higher returns. This is particularly true for South Korea, Taiwan and China, where many tech stocks reside.
Meanwhile, South Korea's government on Tuesday announced that the preliminary export value for July marked a 19.5% year-on-year increase, rising at a double-digit pace for the seventh straight month. The reason for this is twofold. Demand for South Korea's main export items, such as semiconductor chips, ships and steel, is growing. Plus, the country is now exporting more kinds of products and to more destinations.
In July, exports of household goods, cosmetics and agricultural products also increased. By country, India bought 79% more of what the country makes -- a huge jump and a historical high. India's new tax system has made South Korean products less expensive.
Exports to Southeast Asia were also up, by 32% from a year earlier. Some South Korean companies with factories in the region and their demand for parts helped out here.
While the share of exports going to India and Southeast Asia rose to 20%, the share of those going to China and the U.S. shrank to 34%.
South Korea's relations with China deteriorated after the U.S. deployed an anti-missile system in the country, a countermeasure to North Korea's continuing missile development program. And the U.S. is leaning toward protectionism. Both of these factors have bitten into South Korean exports, yet trade with other countries has more than made up the difference.
LG Household & Health Care, a cosmetics and personal care products maker, has been dodging the political risks. The number of Chinese tourists to South Korea declined sharply after China banned group tours in retaliation for the deployment of the anti-missile system. This dented demand for LG Household & Health Care products, yet the company's first-half net profit rose 9% from a year earlier.
The record first-half earnings were boosted by sales of upscale cosmetics in China and by growing demand for products other than cosmetics. LG Household's stock price has improved about 13% since the start of the year.
On Wednesday, South Korea's government announced plans to increase taxes on the wealthy and on corporations. This spurred selling on the stock market, but the decline has been limited. Bank of America Merrill Lynch predicts that South Korean companies' profit per share will increase 43% this year. In other words, there will be plenty left for shareholders after any tax hike.