Morgan Stanley recommended investors boost their holdings of Taiwanese stocks on “subdued” inflationary pressures and reduce South Korean equities on higher policy risks and the prospect of lower earnings growth.
“The growth versus inflation mix appears more favorable in Taiwan than [South] Korea,” Morgan Stanley analysts led by Jonathan Garner wrote in a report yesterday.
The brokerage upgraded Taiwan to “overweight” from “equal-weight” and downgraded South Korea to “equal-weight” from “overweight.”
The TAIEX has climbed 10 percent in the past 12 months, lagging behind a 20 percent advance by South Korea’s KOSPI, even as Taiwan’s consumer prices grew on average less than a third of the pace of its North Asian neighbor during the past three months, Morgan Stanley said.
The brokerage said it expected benchmark interest rates to peak at 3.5 percent in South Korea versus 2.13 percent for Taiwan.
“All other things being equal, this more aggressive rate hike stance in [South] Korea presents more of a threat to the domestically facing parts of the equity market,” the analysts wrote.
The KOSPI sank 1.7 percent to 2,069.92 at the close yesterday, the biggest loss since Nov. 11 last year. Construction and transportation stocks led the declines.
The TAIEX dropped 0.8 percent to 8,954.38.
Analysts have lowered their earnings estimates for South Korea in the near term compared with the emerging markets average, while raising them for Taiwan, they wrote.
A further “weak spot” for South Korea is the market’s “low dividend yield” compared with Asian neighbors excluding Japan and other emerging markets, Morgan Stanley said.
“[South] Korea’s payout ratio of reported earnings of 13.5 percent currently is one of the lowest in emerging markets along with India and Russia,” the analysts wrote.
“Taiwan’s payout ratio is 53.1 percent currently. The trailing dividend yield for Taiwan is currently 3.2 percent versus 1.1 percent for Korea and an Asia Pacific ex-Japan average of 2.6 percent,” they said.
Taiwan is also expected to enter a “super-cycle” from this year to 2020 as the nation benefits from warmer ties with China, the brokerage said.
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