Mark Williams

Why Korea is on the podium for our Fund’s exposure

Mark Williams

This morning, a global television audience will watch the opening ceremony of the 2018 Olympic Winter Games in Pyeongchang, South Korea. As well as providing an opportunity to see some of the world’s finest curlers, lugers and figure skaters, the ceremony offers the prospect of viewing North Korean and South Korean athletes as they march beneath a unified flag, the result of the first bilateral talks in two years. The two countries are also set to enter a joint women’s ice hockey team while North Korea will send a 30-member taekwondo demonstration team and over 200 supporters.

 

We have recently increased our Fund’s South Korean weighting to 10%, the highest since launch and the third largest country exposure currently. Our four Korean stocks include Samsung, one of the official partners for the Games, but our increased conviction in South Korea as an investment destination has nothing to do with ‘thawing’ links between North and South Korea 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. 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. This is in part due to the logic that, as all parties involved would like the regime to remain in place, the likelihood is that it will do so. We acknowledge that two inexperienced premiers (in the United States and North Korea) increase the chances of policy error, and that this should increase the discount for South Korea, but it is still far from giving us a base case of nuclear conflict.

 

Interestingly, when we went to South Korea last year there was almost no talk of the political situation with North Korea. Instead there was more of a focus on changes in corporate governance, which was what we had travelled to examine. The last year has seen an acceleration of long-needed systemic change to the country’s dominant corporate model, which has historically involved all-too-comfortable entangled relationships between the few families controlling large conglomerates (chaebols, literally ‘money clan’ in Korean), the government, and the banks.

 

This change was visible in the December 2016 impeachment of President Park Geun-hye, accused of giving undue access and influence to an unelected advisor, who in turn was accused of bribery. Attempts to stop the chaebols hoarding cash began some years ago but had stalled under the previous regime which was happy to maintain cosy relations with the company owners. Following his election, President Moon Jae-in immediately moved towards embracing a proposed corporate governance code which had been left languishing under Park Geun-hye. In addition, a wave of anti-corruption sentiment is also putting chaebols’ practices under increased scrutiny.

 

As a result of the improving corporate culture, it is increasingly easy to find companies that return money to shareholders in South Korea, which was one of the key reasons for our visit to Seoul last year. During four days we were able to meet the management teams of 19 companies, all of whom paid out dividends, with yields averaging almost 3%. This simply wouldn’t have been possible in previous years.

 

One such company with increasing dividends was in the petrochemical sector which had previously been beset by overcapacity. As some capacity has been closed internationally, and following a decade of low levels of investment, this overcapacity has reduced – opening up an opportunity for us to initiate a value position in one of the sector’s unloved but most efficient operators: LG Chem.

 

The KOSPI index has returned 19.5% over the last 12 months (source: FE, sterling terms, to 31 January 2018), which compares with 27.0% from the MSCI Asia Pacific ex-Japan index and 11.3% from the FTSE All-Share index. The market trades on 9.5x forward earnings, which is still cheaper than its historic average of 10.5x and if we continue to see greater distributions to minority shareholders and further unwinding of some of the conflicting corporate interests there could be more strong equity market performance ahead.

 

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation.  The Fund invests primarily in Asian companies, which may be less liquid than companies in more developed markets.

Disclaimer

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Friday, February 9, 2018, 9:00 AM