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Is widely-held Samsung a risk for EM funds?

About 61% of all emerging market funds are holding positions in Samsung, according to an Evestment report. Any company misstep could have a widespread impact.

Samsung is the only company with a weighting in EM portfolios that averaged more than 3%.

The company faced bad news over the past year. In 2016, its Note 7 smartphone was recalled due to a fire hazard and cost the company billions. Last month, the acting chairman and heir of Samsung Lee Jae-yong was imprisoned for involvement in a scandal that led to the impeachment of the country’s president.

Additional pressure on investor sentiment has come from the rising threat from North Korea.

Investors, however, have shrugged off the bad news and are looking at fundamentals. The share price has been on an upward trend, increasing by 46% to KRW 2.6m ($2,323) from KRW 1.80m at the start of the year, according to data from Bloomberg.

The reason is the growth in the global semiconductor market, particularly memory chips, of which Samsung is a major supplier, said Dan Baker, a Hong Kong-based senior equity analyst at Morningstar. Memory chip production contributes 50%-60% of earnings.

Although the company is a conglomerate and is not fully leveraged to the semiconductor theme, the stock price performance of other pure-play memory providers such as Hynix and Micron has also been on an upward trend, he said.

“Demand for memory is increasing dramatically driven by smartphones, data centres and big data growth. There are also scale barriers-to-entry as investment to build the plants to produce the memory chips is very expensive,” Baker said.

Besides the semiconductor theme, Baker added that Samsung has also announced a better shareholder return policy whereby excess cash will be returned to shareholders.

“Investors have supported Samsung on the back of this,” he said.

Boom and bust cycles?

One risk to holding the stock is the possibility of a big downcycle in memory chip demand.

Baker said that the memory industry has historically gone through deep boom and bust cycles, as increasing demand leads to large increases in capacity and oversupply.

“The hope in the industry is that these cycles will not be as deep now as the number of suppliers has been drastically reduced and the suppliers seem to be behaving more rationally,” he said.

Another potential risk would be a large recall of the Galaxy S series, which has huge volume compared to the Note series.

“Like all tech companies, Samsung has to make sure it stays ahead of consumer tastes,” he said.

Baker also noted that investors should be cautious about Samsung’s earnings. “The company’s earnings can be very difficult to forecast as the earnings from its two largest businesses, semiconductor memory and smartphones, can swing wildly.”

For example, the smartphone business’ operating profit averaged KRW 6.3bn per quarter from 2013 to 2014.

However, from Q3 2014 to Q3 2015, the same business averaged about one-third less (KRW 2.3bn) of operating profit, he said.

Samsung top ten

There are 94 products categorised as emerging market funds available for sale in Hong Kong and Singapore, according to FE data. About 40% of them have 3% or more of their assets in Samsung.

Top 10 funds with highest Samsung allocation

 

Samsung  holding %

3-year  performance 

 Allocation to IT

Schroder – ISF Emerging Asia

8.48%

36.49%*

41.30%

AB FCP – I Emerging Markets Growth Portfolio

7.74%

19.48%*

37.47%

JPMorgan – SAR Global Emerging Markets

7.30%

14.86%*

13.80%

Templeton – Emerging Markets

6.99%

12.27%

31.08%

Baring – Global Emerging Markets

6.90%

24.32%*

27.40%

UBS – Global Emerging Markets Opportunity

6.61%

33.06%*

26.53%

Invesco – Emerging Markets Equity

6.60%

13.89%

29.80%

Schroder – ISF Emerging Markets

6.54%

14.76%*

31.20%

Investec – Emerging Markets Equity

6.50%

6.65%

31.80%

Allianz – Emerging Asia Equity

6.30%

24.83%*

39.50%

Source: FE. All fund data has been converted to US dollars.  *Outperformed the MSCI Emerging Markets Index (14.04%) in US dollar terms)

There has been an impressive run of the tech sector in emerging markets, and Samsung’s stock may be one driver of performance. Seven of the top 10 funds that have the highest weightings in Samsung outperformed the MSCI Emerging Markets Index over the last three-years, according to FE data.


 

EM tech vs broader EM

 

 

Part of the Mark Allen Group.