Compared to its emerging market peer indices in Asia, Korea has underperformed the past 12 months.
Secker in general sees overvalued assets in Thailand, the Philippines, Malaysia and Indonesia and undervalued opportunities in China and Korea, which are the top two weightings in the firm’s emerging markets equity portfolio.
Also driving the Korean market down is sentiment. He believes investors are too negative and focused on downside risk in Korea.
“In our view, investors are paying too much for ‘safe’, quality stocks and overlooking stocks with a degree of risk. On a long- term view, we believe these companies offer value and it is right to take advantage of these opportunities.”
Korea – an emerging market?
Some will argue whether Korea is actually an emerging market. FTSE classifies it as a developed market due mainly to the size of its equity market (15th largest globally) and the country’s strong economic position in the world. But MSCI, the largest benchmark provider, still considers it an emerging market.
Secker describes Korea as “a developing economy but an emerging stock market” mainly due to the chaebols – large family-owned conglomerates – which make up most of the index.
“The chaebols have grown into sprawling conglomerates with many different units that don’t have any sense being in the same group and their governance structures are similar to China’s state-owned enterprises.
“Typically there’s one controlling shareholder that dictates how that company is run.”
Korea’s “emerging” designation comes down to liquidity and the controlling shareholder structure many of these businesses have, he said.
Because the chaebols make up most of the index, the Korean market has always been cheap, he added.
The weight of Samsung
Nonetheless, some of the chaebols are attractive investments, Secker said, adding that Samsung, for example, is the only brand able to compete globally with Apple.
“Samsung has a strong market position and generates decent margins. On a five-year view, we think Samsung’s returns on capital should be higher than the market is pricing in today and therefore it appears undervalued.”
However, he has concerns about the transparency of chaebols.
Samsung has “an organisational chart that looks like a bowl of spaghetti. The founder owns 3% of the business but via the structure controls 20%. It’s very difficult to sort out who owns what.”
The attitude toward shareholders is another concern. Dividend payouts are extremely low.
The government is pressuring chaebols to reform by imposing tax on retained earnings kept on the balance sheet, which would encourage the conglomerates to reinvest in the business or pay dividends, he said.
“Tax incentives to pay dividends will force them to become more shareholder oriented.”
