Tensions between North and South Korea consistently made the news 2017, but this didn’t stop a number of investors from putting sizeable chunks of their portfolio in the latter. It was a strategy which proved rewarding with the KOSPI Index returning 19.5% in sterling terms, but what are the prospects going forward?
Mark Williams, a manager on the Liontrust Asia Income fund, recently increased the portfolio’s South Korean weighting to 10%, which is the highest level since it launched in March 2012 and makes it the third largest country exposure.
The Liontrust Asia Income fund currently has four South Korean stocks in it, which Williams says includes Samsung, which is one of the official partners for the games. However, he argues the increased conviction has nothing to do with ‘thawing’ links between North and South and everything to do with corporate improvements in South Korea.
“The political tension between North and South Korea has possibly been a significant factor in the South’s long-term equity valuation discount to the rest of the region, but we believe the country’s poor corporate governance has been just as important,” says Williams.
“The former issue has been a factor ever since we began investing in South Korea in 1997, and tends to come and go. Recent nuclear developments are clearly negative, while any true long-term improvement in relationships would be a positive. Overall, we see the issue as noise rather than something that should determine investment decisions.”
Strong corporate earnings
Another fund with a high conviction in South Korea is the Matthews Asia ex Japan Dividend fund, managed by Yu Zhang. Versus the MSCI All Country Asia ex Japan Index benchmark weighting of 17.7%, at the end December 2107, the portfolio had 22.2% of its assets in South Korea, making it the second largest country weighting behind China/Hong Kong.
“President Moon Jae-in’s stimulative economic and fiscal policies, together with a robust export sector, underpin and have worked to lift corporate earnings,” says Zhang.
“South Korea’s central bank remains on the sidelines and has resisted the temptation to raise rates as to not stifle the recovery. Earlier this year, President Moon declared a minimum wage hike of about 16% for 2018. This should underpin the domestic economy while stoking inflation and fears of moderately higher interest rates. Geopolitical tensions have calmed recently but remain a source of uncertainty for the economy.”
Zhang also notes that the culture of paying dividends is improving, with South Korea – traditionally a non-dividend payer – just beginning to enter the dividend growth area.
“Developed Asia used to be an area where dividend income was lacking, but a combination of government regulation and investor activism means we now see opportunities in those places,” he says.
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