KOSPI to keep beating Nikkei despite rising won

By Jungyoun Park and Masayuki Kitano - Analysis

SEOUL/TOKYO (Reuters) - South Korea's stock market has been the clear winner this year over rival Japan and looks set to keep outperforming in 2010, despite a rising won currency, due to a robust economic outlook and cheaper valuations.

South Korea was one of the first economies to emerge from the global financial crisis and its benchmark KOSPI index has jumped nearly 40 percent this year, far surpassing a roughly 10 percent rise in Japan's Nikkei share average.

The two near-neighbors are long-standing rivals in North Asia and their manufacturers compete closely in key sectors such as electronics and autos.

"When comparing things with Japan I think you probably can't go too wrong buying South Korean shares while selling Japan," said Goro Fukami, senior portfolio manager at Japanese asset management firm DIAM Co Ltd.

South Korea's won has been strengthening for much of 2009, but still remains well below its pre-global financial crisis levels. That weakness, bolstering the trade competitiveness of South Korean manufacturers over their Japanese rivals, has been a major factor in Seoul's performance.

While some market players expect the won to rise around 20 percent against the yen over the next year, if not earlier, such gains are unlikely to change the broader picture.

CHINA TIES

South Korean's close ties with China's booming economy is one reason to be bullish, as is the fact that its stock market is on the cusp of shedding its emerging market status and gaining broad recognition as an advanced market, boosting the demand for South Korean shares from international fund managers.

Equity valuations also favor South Korean shares.

"My conclusion is that the Korean market will continue to outperform the Japanese market," said Claude Tiramani, fund manager for BNP Paribas Asset Management.

Global investors seem to broadly agree, judging from their differing appetite for South Korean and Japanese shares.

Foreigners bought nearly $22 billion in Korean shares this year, more than five times the $4 billion worth of Japanese stocks they purchased, according to Nomura International.

"For people conducting global allocation, being underweight Japanese stocks is probably a given, and the only question is by how much," said Tetsuro Miyachi, general manager of Franklin Templeton Investments Japan Ltd's investment planning department, adding that his comments reflected his personal opinions and not the views of his company.

The 12-month forward price/earnings ratio on the MSCI Japan stood at 21.6 as of November, twice as high as the 10.8 forward p/e ratio on the MSCI South Korea, according to Thomson Reuters I/B/E/S.

Earnings momentum is also brighter in Korea, with the one-month change in forward earnings estimates up 3.1 percent in Korea -- the second highest in Asia -- against just 0.5 percent in Japan, among the lowest in the region.