SEOUL, Jul. 21 (Korea Bizwire) — An increasing number of South Korean investors are showing interest in government bonds from countries such as Brazil, Mexico and Russia, with the value of Brazilian government bonds sold in South Korea during the first half of this year estimated to be around three trillion won, according to recent financial industry reports.
Despite the unstable political climate, an overall favorable view of emerging markets saw over 4 trillion won in Brazilian government bonds sold in the last 18 months in South Korea.
Most of the Brazilian bonds traded in South Korea come with the risk of foreign exchange exposure, which means even though the yield is only around 10 percent, the final outcome could drastically differ depending on the current exchange rate.
Brazil is rich in agriculture and natural resources such as ironstone and has a strong manufacturing industry, boasting the largest economy in Central and South America. Since 2002, Brazil has withstood several financial crises and political surprises, attracting foreign direct investment and positive reviews.
“Brazil reacts to market volatility well and is inclined to reduce interest rates as part of its monetary easing policy. With economic improvement both domestically and internationally, (the country) is more than capable of handling exchange rate volatility,” Shin Hwang-jong, the head of the Global Credit Team at NH Investment & Securities said.
However, others warn investors to take into consideration political elements that could result in market and foreign exchange volatility.
Earlier this year when an illegal fund scandal surrounding Brazilian President Michel Temer resurfaced, Brazilian government bond prices tumbled.
With many South Korean investors having suffered from a sudden drop in value of the Brazilian real after purchasing 10 trillion won in Brazilian government bonds between 2011 and 2012, some economists recommend diverting attention to Mexico and Russia.
“Countries like Brazil, Mexico and Russia keep their interest rates between 7 to 10 percent while pursuing monetary easing policy. As they are increasingly more prepared for market volatility, given their foreign exchange reserves, for instance, an annual yield of around 8 percent is expected,” Shin said.
Jung Ui-min, a researcher at Mirae Asset Daewoo, recommends Mexican government bonds for investors, citing the unlikelihood of a trade war between Mexico and the U.S.
Ashley Song (firstname.lastname@example.org)