Profits Tied to Exchange Rate: Expert

“If the won-dollar exchange rate breaks the 900-won mark or the prices of oil and semiconductors become unstable, Korea’s net business profit is not likely to increase next year.”

Sakthi Siva (40, picture), Head of Asian Equity Strategy of UBS, a premier global financial services firm predicted as above in an interview with some media including Dong-A Ilbo on December 7 when she visited Korea to analyze the Korean stock market.

Siva emphasized, “The performances of Korea’s leading companies such as Samsung Electronics and Hyundai Motors depend on four factors, i.e., prices of DRAM and NAND flash memory, oil prices and the won-dollar exchange rate. In particular, the strong won is one of the biggest threats to Korean business performance.”

Siva added, “If the prices of oil and semiconductors become stable, Korean businesses’ net profits could increase even if the won-dollar exchange rate breaks the 900-won mark. However, the net profits won’t go up if the exchange rate goes down even lower or oil and semiconductor prices become volatile.”

Siva has been known as one of the best strategists in charge of Asia and has been nominated as “stock strategist of the year” for two consecutive years in 2005 and 2006 by the Institutional Investor, a global financial magazine.

Regarding the sell-off in which foreigners sold 1.3 trillion won worth of Korean stocks this year, she said, “That took place since the performance of Korean businesses was below forecasts. The selling will continue as long as performance does not improve.”

In fact, financial institutions including UBS estimated at the end of 2005 that the net profit of Korea’s 80 leading companies would grow 9.2 percent in 2006, but they fell 5.3 percent so far by November.

On the other hand, net profit growth (average 14.5 percent) of leading Asian countries’ businesses such as those in China (net profit forecast 12.4 percent → 24.2 percent in reality) and India (22.0 percent → 26.0 percent) intensively bought by foreigners was above the forecast (11.9 percent).

But, she expected Korean businesses’ net profit in 2007 to increase by 15-20 percent compared to this year if the won-dollar exchange rate stays at 950 won, and semiconductor and oil prices become stable since Korean businesses’ net profit showed minus growth in 2005 and 2006.

UBS is a global investment bank based in Switzerland and ranked first among the top 1000 world banks in terms of total assets, which were $1.533 trillion in 2005.

larosa@donga.com