By Lim Jeongjin
SEOUL, Jan 29 (Reuters) - Samsung Electronics Co Ltd looks set to lead a market rally, while bigger domestically-focused shares, notably Kookmin Bank , should do well as the economy grows, fund managers and analysts say.
The South Korean stock market has greater upside potential this year because it underperformed against major Asian markets in 2003 and because of expected earnings growth, they said.
South Korea's benchmark KOSPI index gained 29.2 percent in 2003, while MSCI's broadest index of Asia Pacific stocks rose 38 percent.
The KOSPI is trading at a combined forecast price to earnings multiple of 8.1, compared with 21.1 for the Nikkei and 16.5 for Hong Kong. This discount for Korea is partly due to political turmoil and the North Korean nuclear threat.
Investors are most bullish on technology and auto stocks, which should benefit from an economic recovery and an expected revival in domestic consumption.
"Technology shares, including Samsung Electronics, will be favoured in the first half on the back of the current IT sector-driven global economic recovery," said Lee Jae-hyun, chief fund manager at KEB Commerz Investment Trust Management Co.
"When prices of technology stocks become somewhat overvalued, I think the banking sector will probably take the lead, given its lower valuations and earnings recovery momentum."
Samsung Electronics is expected to show solid earnings growth in the first half of this year thanks to growing sales of flash memory chips used in digital cameras and other devices, after the company posted a 24 percent jump in fourth-quarter net profit.
Shares in Samsung Electronics, Asia's most valuable electronics company at about $70 billion, have enjoyed a New Year buying spree on expectations of strong earnings.
"There is no share to compare with Samsung Electronics, given the company's healthy fundamentals, despite the stock's high price," said Jo Jae-hoon, an analyst at Daewoo Securities.
The shares have gained 21 percent in the last six months, above an 18 percent gain in the broader market and have kept hitting record highs.
"Samsung is no longer a mere DRAM player or just a Korea listed local stock. The company has proved itself as one of the outstanding global IT players over the past several years," said Merrill Lynch. It has revised its 12-month target price on Samsung Electronics from 620,000 won to 750,000 won.
Samsung Electronics closed down 0.9 percent at 533,000 won on Thursday. They trade at 14.3 times forecast earnings per share, far below Intel Corp's 41.0, Sony Corp's 70.6 and Philips Electronics' 54.7.
Another favoured stock is the country's biggest retail bank, Kookmin. Growing confidence in the domestic economy backed by a gradual revival in consumption look set to draw investors to banks, with Kookmin the sector pick, say fund managers.
"I think banks will bring the strongest earnings recovery this year, based on the assumption that the credit card sector will stabilise, not requiring massive provisionings like banks had last year," said Park Yoon-sik, a fund manager at Tong Yang Investment Trust Co.
"Kookmin Bank will be the prime beneficiary of the domestic economic recovery as household and private financing markets are picking up," Park said.
Local banks experienced one of their worst years in 2003, hit by increased provisions and bad loans stemming from the struggling credit card market. This kept most investors away from the banking sector.