(Reuters) - Low domestic interest rates, a strong won and regulatory changes in the insurance industry are enticing South Koreans to invest in overseas assets. Recent central bank data show South Korea’s investment in overseas assets surged to a record high of $68.2 billion in the first eleven months of 2017.
Investments in overseas bond and equity markets rose to $37.7 billion and $30.5 billion respectively, last year, from a total of $59.7 billion in both asset classes in 2016. “Residents are taking advantage of favourable exchange rates to increase their exposure in overseas assets,” said Khoon Goh, head of Asia research at ANZ Banking Group. “There is a greater array of potential investments possibilities outside South Korea and hence we tend to see residents increasing their offshore investments.”
(For a graphic on South Korea investments in overseas equity and debt instruments, click bit.ly/2DQSnYy)
The rise in overseas investments was also underpinned by the limited returns on offer in domestic assets. South Korea’s 10-year government bond gave a lower return than U.S. Treasuries for much of 2017. It currently offers just about 5 basis points more than U.S. bonds. As major central banks have already started or are on the way to paring their massive monetary stimulus, analysts expect South Koreans to plough more of their money in overseas assets in the coming months.
One sector that is keen to invest overseas is South Korea’s insurance industry, which has been gobbling up overseas debt in the past year, both for better returns and also to comply with regulatory standards. Some analysts said the adoption of the so-called IFRS17 standard in 2021 - aimed at reducing duration mismatches - would drive South Korean insurance companies to invest more in overseas bonds. Deutsche bank said in a report it expects a rise of about $65 billion in overseas investments per annum through to 2021, when IFRS will be enforced.
The won is up 1 percent this year after rising more than 12 percent in 2017 and analysts expect foreign exchange authorities to intervene to cap the local currency, which has raced past its Asian counterparts.
Earlier this month, Reuters reported South Korean foreign exchange authorities were suspected of buying dollars to signal they will not allow the won to rise beyond the 1050 level.
(For a graphic on yield spread of South Korean government benchmark over U.S., click bit.ly/2ncBluK)
So far, overseas investments by local investors have not influenced the won much, as insurers have opted to fully hedge their foreign exposure.
However, plans by the National Pension Service (NPS), the third largest public pension fund in the world, to stop hedging its overseas bond investments may see other insurance companies follow suit.
NPS will stop currency hedging of its overseas bond investments from 2019 after hedging is reduced between 2017 and 2018.
“It remains to be seen if they (Korean insurers) would take the cue from the NPS and take more FX exposure as the Korean won moves further into the overvalution territory,” said the Deutsche bank report.
“Clearly, such a shift would have significant impact on the Korean won’s performance ahead.”
(For a graphic on Asian countries' holdings of U.S. treasury securities, click bit.ly/2Dzt1ep)
Reporting by Patturaja Murugaboopathy in Bengaluru; Editing by Vidya Ranganathan & Shri Navaratnam