Rising regional tensions and the threat of nuclear war have not seemed to overly worry investors in South Korea this year, with the Kospi 200 index returning an impressive 18.6% in the first nine months of the year.
‘The South Koreans seem surprisingly sanguine about recent developments,’ said Ed Wiltshire, an Asia Pacific equities fund manager at Aviva Investors. ‘But, it must be remembered they have been living with the threat of their belligerent neighbour for many years.
‘With Seoul and its environs only 35 miles from the North Korean border and home to about half the country’s population, Pyongyang has long had the conventional weaponry to devastate its southern neighbour.’
The constant geopolitical risk has led South Korean president Moon Jae-in to take a more measured course with the North, emphasising his continuing desire for dialogue rather than issuing threats, argues Wiltshire.
However, the intervention of a belligerent US president in July helped kick off a war of words that elevated tensions to highs not seen in years.
This led the market, which had been on a steady march since the beginning of 2017, to see a slight, if somewhat unsurprising, downtick as investors began creaming off profits accumulated since the start of the year.
‘The market has sold-off on negative headlines, but as before, weakness has been short-lived. South Korea has lagged the broader region in recent months, but this
may be as much to do with concerns over some of the new government’s populist policies,’ said Invesco Perpetual Asian fund manager William Lam.
‘It is also worth remembering that South Korea is still one of the best performing markets in Asia so far this year.’
The seven-month rally in the Korean stock market before the sell-off was in part powered by growing global demand for the country’s technology exports.
‘When global trade and GDP are up, one of the beneficiaries, as a small, open and trading nation, is South Korea,’ said Alex Wolf, an emerging markets economist at Aberdeen Standard Investments.
‘This year has been no exception, with South Korea excelling under increasing global tech demand, especially with semiconductors, which reached record export levels in August, a trend that continued throughout the rising tensions.’
Standard Life Investments’ flagship Global Absolute Return Strategies (Gars) fund said in June that: ‘[Korean] companies have responded to the past five lean years by controlling costs and improving productivity. This means they are particularly well-placed to benefit from improving demand, with a greater proportion of sales revenue translating into profit.’
Another positive that has helped the market rally are improvements in corporate governance issues, added Aviva’s Wiltshire.
‘Putting the North Korean situation to one side, recent developments in the South, with respect to probable reform of the large conglomerates that dominate the market are very positive for the international investor.
‘Political intent with regard to cleaning up the companies has been clear ever since the impeachment of the last president [Park Geun-hye] for her part in a cash for influence scandal,’ Wiltshire said.
‘The recent five-year imprisonment of [Lee Jae-yong,] the chief of Samsung, South Korea’s largest company, for bribery has only served to underline this.’
Samsung, which represents 16% of the Kospi 200 index, has long been considered too important to the South Korean economy to censure, with people dubbing its CEO ‘too big to jail’. The five-year sentence he received is seen by many as a bellwether for governance in the region.
‘Part of the discount [in the South Korean stock market] is due to geopolitical risk, which is fair,’ agrees Invesco’s Lam. ‘Most of it is due to Korea’s reputation for poor corporate governance – and low dividend payout ratios.
‘Geopolitical tensions are a concern, but we continue to believe that there is only a very small probability of there being major disruption in the medium term. The fund’s positioning in South Korea is also largely unchanged since the end of May, if anything it has been pared back slightly as we have taken some profits from recent outperformers.’
He added: ‘Geopolitical risk is a factor in limiting the extent of which we are prepared to be overweight South Korea, but if the market had reacted more negatively to recent events I would have been happy to add in areas where share prices were below what we consider to be fair value.’