Page *Go to a source such as www.investing.c (Links to an external site.) and fi
ID: 2810603 • Letter: P
Question
Page *Go to a source such as www.investing.c (Links to an external site.) and find the CURRENT benchmark rate for the South Korean (use the one- year SK government bond rate) compare that to our CURRENT one-year U.S. Treasury Bill rate: Make sure you are comparing "like" (1-year) rates for the two countries. Question 2: The stock market is sometimes used as an indicator of expected business conditions in the SK, which could affect the number of students who can afford a college education in the U. S. Inspect the trend in the performance of the KOSPI stock index (see recent performance of the South Korean Stock Exchange) over the past several years. Based on recent stock market trends, is the outlook favorable or unfavorable for your business? Explain how and why this information is/might be relevant to your business.Explanation / Answer
Bank of Korea
The central bank of South Korea is the Bank of Korea. Price stability is the main objective of the monetary policy of the central bank of South Korea. Inflation targeting is the monetary policy which aims to achieve an explicit target for the level of inflation.
Bank of Korea base rate
When reference is made to the South Korean interest rate this often refers to the Bank of Korea base rate. Before, the Korean interest rate was called the overnight call rate, but since March 2008 the term Bank of Korea base rate or base rate is being used. By changing the Bank of Korea base rate the central bank of Korea is influencing the interest rate of products like mortgages, credit and savings accounts. Doing so the consumption and investment levels are being influenced which has an effect on price levels and therefor on inflation.
Last Bank of Korea Changed rates on 30th November 2017 to 1.5%
South Korea 1-Year Bond Yield : 1.840%
U.S. 1 Year Treasury Bill : 2.59%
Korea - Stock Market
The economy appears to have taken its foot off the gas in July–September, after growth held steady for the second consecutive quarter in April–June. In August, consumer confidence fell into pessimistic territory for the first time since March 2017, primarily due to lower confidence regarding current and future domestic economic conditions. Moreover, the unemployment rate increased for the second month in a row in August to reach the highest in nearly nine years. These two developments pose downside risks to private consumption in Q3. Meanwhile, pending spending from the extra FY 2018 budget, which was approved in May and contained a total of USD 3.8 billion, should support government consumption. Looking further ahead, on 28 August, the Ministry of Finance proposed the largest budget increase in a decade for FY 2019, with an eye on shoring up an increasingly-shaky labor market.
Ratio of total market cap over GDP: Maximum - 140%; Minimum - 36%; current - 80%
Expected future annual return: 9.9%
ETF Used for dividend yield: EWY (Yield=3.68%)
Market Index used: KOSPI
Current Annual GDP: $1,609 billion US dollars or 1,792,220 in billions of national currency (GDP in Local Current Prices Annual Growth=6.72%)
Data since year 1997
Korea Historical GDP Growth
Historical GDP of Korea in billions of national currency. The GDP in local current prices has grown at the annual rate of 6.72% over the past 8 years. Please note this growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $1,609 billion US dollarsor 1,792,220 in billions of national currency.
Historical Stock Market Cap
Historical total market of Korea in billions of national currency. This value is normalized using the data published by WorldBank. KOSPI is used for the normalization. This is the index of all common stocks traded on the Stock Market Division of the Korea Exchange.
Historical Ratio of Total Market Cap over GDP (%)
The current ratio of total market cap over GDP for Korea is 80%. The historical high was 140%; the historical low was 36%. If we assume that the ratio will reverse to the historical mean of 83% over the next 8 years, the contribution to expected annual return is -0.5%. This is the detailed historical chart of the ratio.
Predicted and Actual Returns
Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1
We can compute the predicted and actual returns of the Korea stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below. The green line indicates the expected, or predicted return if the market ratio trends near the average ratio of 83% over the next eight years.
The blue line indicates the actual, annualized return of the Korea stock market over eight years. We use “KOSPI” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the blue line is closely parallel to the green line.
Conclusion
The stock market of Korea is expected to return 9.9% a year for the coming years. This is from the contribution of economic growth in local current prices: 6.72%, Dividend Yield: 3.68% and valuation reverse to the mean -0.5%.
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