Page 34 - DIY Magazine March 2018

A UNITED KOREA: THE INVESTMENT PERSPECTIVE
Ben Surtees, Manager Jupiter Asian Fund
As unlikely as it seems, and despite the recent isolationist rhetoric of North Korea’s Kim Jong-un, the 2018 Winter Olympics could witness the first steps towards the reunification of the Korean peninsula. Rivalled only by the coming together of East and West Germany in the 1990s, reunification would be a historic political event. But would it be good news for investors? Ben Surtees, manager of the Jupiter Asian Fund, argues that while reunification would be extremely challenging in the short term, if Korea can withstand the short-term hardship, the long-term benefits could make the pain more than bearable.
IGNORE THE NOISE
Following a period in which North Korea has antagonised much of the West with a series of threatening missile tests, the decision by the two Koreas to field a joint team at this year’s Winter Olympics had Korea ‘watchers’ divided over the importance of the move. Was it a first baby step towards the reunification of the two Koreas, or a cynical ploy by North Korea to gain more bargaining power as it seeks to get sanctions lifted against the country?
All this political noise is nothing new for investors in South Korea who have had to withstand corruption, international sanctions and the threat of war on an almost continuous basis since the end of official hostilities with the North in 1953.
Just last year, President Park Geun-hye was impeached and imprisoned for corruption following weekly protest rallies, China banned some of its citizens from visiting South Korea in reaction to the government’s decision to install a US missile defence system, and North Korea successfully created and tested a hydrogen bomb. Unsurprisingly, many investors ran for the hills. The major stock market index of South Korea, the KOSPI index, however, still proved to be one of the better performing in Asia, with one-year returns of 20%.
STARTING FROM A DISCOUNT
Bearing in mind its strong performance in 2017, it
is worth noting that this is a stock market that is still cheaper than most comparable emerging markets, and this gap has continued to widen. It is now recognised
to be trading at a discount (i.e. it’s sold at less than its value) which is regarded as an attractive entry point. Ironically, this comes at a time when the earnings growth of companies making up KOSPI is forecast to be one of the highest in the region.
Of course, the North Korean threat is a major contributor to this discount, but even this is outweighed by South Korea’s poor corporate governance record. South Korean companies are plagued, in our view, by boards lacking independence and more questionable business ethics, highlighted by the fact that the dividend pay-
out ratio – the amount of dividends paid out relative to the total net income of the company – of South Korean companies is at almost half the level of anywhere else in Asia.
However, this discount is not necessarily structural, and the tide could very well be turning. The introduction
of a liberal government has seen the introduction of a stewardship code which aims to enhance the quality
of engagement between companies and shareholders. A similar code has been introduced in Japan and had a positive impact on the Japanese market, boosting the valuations of Japanese companies that chose to embrace better standards of governance and adopt
DIY Investor Magazine | Mar 2018 34