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BLOG: Can Korea’s equity rally continue?

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Written by: Darius McDermott
13/02/2018
All eyes are on PyeongChang, following last week's opening of the 2018 Winter Olympics. As the South Korean city plays host to skiing, luging and snowboarding, does Korea's market offer just as much exhilaration off the slopes for investors seeking new opportunities?

Matthew Vaight, who runs the FundCalibre Elite Rated M&G Global Emerging Markets fund, pointed out that South Korea was one of the best-performing equity markets last year, having returned an average of almost 34.54% in sterling terms in 2017 alone (based on the MSCI Korea equity index), according to FE Analytics.

“Despite strong gains the [South Korean] market’s valuation remains roughly the same,” the manager said. “Korea remains attractively valued and has always been one of the cheapest markets, but this historic ‘Korean discount’ should narrow at some point.”

Vaight said many investors remain sceptical about buying into the country’s equities because of poor corporate governance practices. However, he argued that this is improving, with the government having recently passed reforms to stop the mistreatment of minority shareholders. In turn, this has led to an increasing distribution of dividends to investors.

“Even after this progress, Korea’s payout ratio remains well below that of other markets and we believe there is plenty of room for them to grow,” he added.

How can I get exposure to Korean equities in my portfolio?

South Korea may seem like a niche equity market, but it is home to several household names that have been around for years such as Hyundai, Samsung and LG. Indeed, 50% of the index is made up of tech stocks, a sector where South Korea has historically been – and remains – a world leader.

M&G Global Emerging Markets currently has a 17.5% weighting to South Korean equities, compared to its MSCI Emerging Markets benchmark’s weighting of 15.4%. Among his top holdings are Samsung Electronics and South Korean banking firm Shinhan Financial Group.

The £2bn fund has 66 holdings spread across several regions (with South Korea its second-largest allocation and China its largest at 23.7%). The manager holds a mix of different-sized companies – from mega-caps upwards of $50bn to small-caps of less than $2bn – and these are chosen based on each company’s individual merits with the aim of providing both growth and income over at least five years.

Another offering we like, which has an even higher weighting to South Korean equities at 16.57% is Edward Lam’s MI Somerset Emerging Markets Dividend Growth. Like M&G Global Emerging Markets, the £1.5bn fund will also invest across the cap spectrum and the manager selects each holding on an individual basis.

However, the portfolio is more concentrated at approximately 40 holdings. These are chosen with – as the fund’s name suggests – more of a focus on dividend growth. When choosing stocks, Lam places emphasis on long-term free cash flow (the money a company makes minus its expenditure) and whether the company’s dividend is above that of the broader market. Examples of his largest individual holdings include South Korean semiconductor firm SK Hynix and Samsung Electronics.

Finally, for those who want some exposure to South Korean equities but have a little less conviction in the market area, Matthews Asia Pacific Tiger could be a good offering. Headed up by Sharat Shroff, the £389m fund has a 12.5% weighting in South Korean equities which, while still a sizeable chunk of the overall portfolio, is a 5.2% underweight to the country relative to its MSCI AC Asia Pacific ex Japan index. Sharat holds DB Insurance Company in his list of top 10 holdings.

Shroff holds each investment for a long period of time, honing his search on ‘steady Eddie’ companies which can generate sustainable earnings throughout an entire market cycle.

To sum up, there are indeed attractive fundamentals on offer in South Korea and this view is shared by a number of fund managers. However, that is not to say investing in the country is without its risks; as is often the way with emerging market equities, Korean stocks have tended to be more volatile than the broader global equity market over the years. As such, it pays to spread risk and remain well-diversified.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre

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