bonsai
03-29-2004, 10:39 PM
Foreign Investors Are Going Seoul-Searching
Some U.S. money managers view South Korea as an attractive market despite its problems. But others are content to wait on sidelines.
By Stephen Schurr
Financial Times
March 29, 2004
A maxim from global investor Sir John Templeton recommends that investors buy into a market when "there's blood in the streets." In the case of South Korea, fisticuffs in parliament may suffice.
This month, a melee broke out on the floor of South Korea's National Assembly after a vote to impeach reform-minded President Roh Moo Hyun. U.S. investors with their eyes on Seoul added political instability to a list of uncertainties — the fate of North Korea, concerns about corporate governance and reform and the high levels of consumer credit card debt.
Despite these concerns, money managers remain confident that the political situation will be resolved and that South Korea is one of the world's best bargain-hunting opportunities.
"The Korean market remains attractive at these levels," said Paul Matthews, founder of the Matthews Asian Funds family and manager of the Matthews Korea fund. Although Matthews and others don't think politics in Seoul will be resolved overnight, they point out that in the meantime, the market offers enticingly low price-to-earnings ratios.
The Seoul market has been one of the great success stories of the last few years. The South Korean composite index, or Kospi, has risen more than 60% in the last year and has returned 8.5% a year on average over the last five years. On a valuation basis, the Kospi still looks very cheap. Its current price-to-earnings ratio is 11.8.
Some skeptics say the low valuations are not tempting enough.
"While there is genuine earnings growth in Korea, the low valuations are justified," said Edmund Harriss, lead manager of the Asian Focus fund at Guinness Atkinson Funds. He said concerns about the banking sector and consumer weakness have led him to reduce his exposure to South Korea.
Of course, a developing market such as South Korea may not merit the richer valuations of a firmly established economy such as the U.S., even though political impeachment and corporate governance scandals do have a familiar ring to U.S. investors.
Longtime South Korea watchers note there has been genuine reform in the Korean markets, though not as much as investors might hope for in banking and among the family-run conglomerates, or chaebols, that dominate South Korean industry.
Matthews notes that many South Korean companies, such as KT Corp., are considering increasing dividend payouts, which would further entice U.S. investors.
"There are plenty of reasons why stocks are cheap," said Jamie Doyle, portfolio manager for the Causeway International Value fund. "But as we look across the globe, we keep coming back to Korea as a source for some really cheap stocks — and these are stocks that are world beaters."
The biggest of the "world beaters" is Samsung Electronics Co., which makes up 22% of the Kospi. With a P/E ratio in the high single digits, it may be the world's cheapest tech stock; other semiconductor companies trade at 25 to 35 times earnings and have worse growth prospects.
"Samsung has consistently generated 20% to 30% return on equity, which is extraordinarily tough to do in 'commodity tech' markets," Doyle said.
Efficiency, innovation and cost-containment policies helped Samsung reap profit in its dynamic random-access memory, or DRAM, chips business when rivals such as Micron Technology Inc. and Infineon Technologies were awash in red ink. Meanwhile, the company's leading role in high-growth areas, including liquid crystal display technology and flash memory, put it in good stead for the next several years.
For money managers, Samsung has become the Seoul equivalent of Cisco Systems Inc. in the 1990s, when the saying went, "nobody gets fired for owning Cisco." Even South Korea bears such as Harriss own Samsung (he also favors steel giant Posco).
Another trend working in Samsung's favor is the gush of foreign money flowing into South Korea. In the near term, large-cap companies, especially Samsung, tend to draw the largest portions of new cash.
There are conflicting trends at work within the South Korean market, several of which pivot around issues of foreign and domestic demand.
First, the nation has relied strongly on exports, with manufacturing sectors performing well, while the domestic economy remains fragile. The banking system is in need of reform, and the recent credit-happy consumer binge has left 3 million people in default on their debts.
Investors cautious about South Korea's prospects think this trend will continue, but Matthews believes it will shift as the domestic economy strengthens.
The other conflict has to do with investor perceptions at home and abroad. Foreign investors have bought into the South Korean growth story. The market is nearly 50% owned by foreigners, who withdrew little money amid the political flare-up this month.
However, individual South Korean investors have little confidence in their own market, partly because of cynicism about the chaebols, the perception of crony capitalism and painful memories of the crisis that crushed Seoul's markets in 1997.
With the exception of active short-term traders, South Koreans have mostly abandoned the stock market in favor of bonds that return 3% to 4%. If reform takes hold and the nation's growing middle class decides to put more money into stocks, it could be good news for the Kospi.
Some U.S. money managers view South Korea as an attractive market despite its problems. But others are content to wait on sidelines.
By Stephen Schurr
Financial Times
March 29, 2004
A maxim from global investor Sir John Templeton recommends that investors buy into a market when "there's blood in the streets." In the case of South Korea, fisticuffs in parliament may suffice.
This month, a melee broke out on the floor of South Korea's National Assembly after a vote to impeach reform-minded President Roh Moo Hyun. U.S. investors with their eyes on Seoul added political instability to a list of uncertainties — the fate of North Korea, concerns about corporate governance and reform and the high levels of consumer credit card debt.
Despite these concerns, money managers remain confident that the political situation will be resolved and that South Korea is one of the world's best bargain-hunting opportunities.
"The Korean market remains attractive at these levels," said Paul Matthews, founder of the Matthews Asian Funds family and manager of the Matthews Korea fund. Although Matthews and others don't think politics in Seoul will be resolved overnight, they point out that in the meantime, the market offers enticingly low price-to-earnings ratios.
The Seoul market has been one of the great success stories of the last few years. The South Korean composite index, or Kospi, has risen more than 60% in the last year and has returned 8.5% a year on average over the last five years. On a valuation basis, the Kospi still looks very cheap. Its current price-to-earnings ratio is 11.8.
Some skeptics say the low valuations are not tempting enough.
"While there is genuine earnings growth in Korea, the low valuations are justified," said Edmund Harriss, lead manager of the Asian Focus fund at Guinness Atkinson Funds. He said concerns about the banking sector and consumer weakness have led him to reduce his exposure to South Korea.
Of course, a developing market such as South Korea may not merit the richer valuations of a firmly established economy such as the U.S., even though political impeachment and corporate governance scandals do have a familiar ring to U.S. investors.
Longtime South Korea watchers note there has been genuine reform in the Korean markets, though not as much as investors might hope for in banking and among the family-run conglomerates, or chaebols, that dominate South Korean industry.
Matthews notes that many South Korean companies, such as KT Corp., are considering increasing dividend payouts, which would further entice U.S. investors.
"There are plenty of reasons why stocks are cheap," said Jamie Doyle, portfolio manager for the Causeway International Value fund. "But as we look across the globe, we keep coming back to Korea as a source for some really cheap stocks — and these are stocks that are world beaters."
The biggest of the "world beaters" is Samsung Electronics Co., which makes up 22% of the Kospi. With a P/E ratio in the high single digits, it may be the world's cheapest tech stock; other semiconductor companies trade at 25 to 35 times earnings and have worse growth prospects.
"Samsung has consistently generated 20% to 30% return on equity, which is extraordinarily tough to do in 'commodity tech' markets," Doyle said.
Efficiency, innovation and cost-containment policies helped Samsung reap profit in its dynamic random-access memory, or DRAM, chips business when rivals such as Micron Technology Inc. and Infineon Technologies were awash in red ink. Meanwhile, the company's leading role in high-growth areas, including liquid crystal display technology and flash memory, put it in good stead for the next several years.
For money managers, Samsung has become the Seoul equivalent of Cisco Systems Inc. in the 1990s, when the saying went, "nobody gets fired for owning Cisco." Even South Korea bears such as Harriss own Samsung (he also favors steel giant Posco).
Another trend working in Samsung's favor is the gush of foreign money flowing into South Korea. In the near term, large-cap companies, especially Samsung, tend to draw the largest portions of new cash.
There are conflicting trends at work within the South Korean market, several of which pivot around issues of foreign and domestic demand.
First, the nation has relied strongly on exports, with manufacturing sectors performing well, while the domestic economy remains fragile. The banking system is in need of reform, and the recent credit-happy consumer binge has left 3 million people in default on their debts.
Investors cautious about South Korea's prospects think this trend will continue, but Matthews believes it will shift as the domestic economy strengthens.
The other conflict has to do with investor perceptions at home and abroad. Foreign investors have bought into the South Korean growth story. The market is nearly 50% owned by foreigners, who withdrew little money amid the political flare-up this month.
However, individual South Korean investors have little confidence in their own market, partly because of cynicism about the chaebols, the perception of crony capitalism and painful memories of the crisis that crushed Seoul's markets in 1997.
With the exception of active short-term traders, South Koreans have mostly abandoned the stock market in favor of bonds that return 3% to 4%. If reform takes hold and the nation's growing middle class decides to put more money into stocks, it could be good news for the Kospi.