A HEDGE fund that has returned 30 per cent this year is bullish on Korean bank stocks on the view local policymakers will cut interest rates less than the market is forecasting. 

The nation’s financial firms will also benefit as populist calls for tighter regulation ease after legislative elections due in April, according to Life Asset Management, which oversees the equivalent of US$643 million. Higher interest rates are generally favorable for banks as they enable them to have wider net interest margins.

“Those expecting a big rate cut by the Bank of Korea next year may be disappointed,” said Darren Kang, chief executive of Life Asset in Seoul. “Korea’s economy isn’t doing bad, with corporate earnings growth for next year expected to be the best in the world. For financial stocks, now is the time to buy.”

Local banks are also attractive due to their high dividend payouts and cheap valuations, Kang said. The hedge funds top picks include Woori Financial Group, which has relatively little exposure to the beleaguered real estate sector, and Meritz Financial Group, he said.

The Bank of Korea will probably lower its key rate by just 25 basis points next year to 3.25 per cent, based on the scenario that the Federal Reserve trims its benchmark by 75 basis points, Kang said. Economists are much more dovish, predicting the BOK will ease by 125 basis points over the course of 2024, according to a Bloomberg survey published this month.

Life Asset’s flagship fund, which seeks corporate governance reforms at Korean firms through a strategy of engagement with the management, has returned about 36 per cent since its inception in July 2021, according to its marketing material. The broader Kospi index has dropped 20 per cent over the same period.

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Returns have been boosted this year by the fund’s bullish bets on local industrial companies that have benefited from the US-China trade war, Kang said.

Korean banks slumped earlier this year after President Yoon Suk Yeol criticised them for engaging in a “money feast” at the expense of their customers, and lawmakers promised to impose a new tax on their profits before the next parliamentary elections. An index of the nation’s lenders slid 13 per cent over February and March, though it has since recovered to be up 10 per cent for the year. BLOOMBERG