Why Investors Will Choose Their South Korean Stocks Carefully In 2016

  • Global stock funds pick plays on Asian household spending
  • Forecasters see Kospi in 1,800-2,200 range for a sixth year

International investors who pulled the most money in four years from South Korean equities in 2015 look set to buy only selectively this year, favoring companies that can profit from resilient Asian consumer spending.

More than $3.5 billion of foreign outflows last year helped keep the benchmark Kospi stuck in its five-year range between 1,800 and 2,200 points, a corridor referred to locally as “Boxpi” that seven money managers surveyed by Bloomberg predict will hold into 2016. For Fidelity International and Eastspring Asset Management, South Korean consumer companies offer compelling returns in an otherwise lackluster market.

The industry was among the bright spots of Korea’s stock market last year as Asian economies accelerated a transition from dependence on manufactured exports to consumer-led growth. Amorepacific Corp., a cosmetics maker popular among Chinese tourists, and Nongshim Co., a ramen noodle maker, both gained more than 70 percent. Data on Tuesday may provide more evidence of growing consumer demand from China, with retail sales in the country projected to increase 11.3 percent in December, almost twice the pace of factory production.

“Korea is diversifying exports into the consumption sector, such as entertainment, cosmetics and so on, with China’s purchasing power, and we are looking at those consumption-driven companies,” Catherine Yeung, an investment director at Fidelity International, which manages $258 billion, said in a phone interview from Hong Kong on Jan. 15. “Investors’ sentiment is very, very negative, and the selloff is not only for Korea but for the entire emerging markets.”

Among the biggest sellers of South Korean equities in December were those from nations worst hit by volatility in Chinese markets and the global commodity slump. Investors from Saudi Arabia led the way, withdrawing 773 billion won ($638 million), according to data from Korea’s Financial Supervisory Service. China pulled out 588 billion won, while Australia followed with 274 billion won, the FSS said.

Such distressed sales can leave equities at bargain prices, said Huh Nam Kwon, chief investment officer at Shinyoung Asset Management, which oversees 13 trillion won. The Kospi’s price-to-book ratio was 0.9 as of Jan. 18, lower than the Nikkei 225 Stock Average’s 1.5 and the Shanghai Composite Index’s 1.7, according to data compiled by Bloomberg.

Regional Players

Yet some Korean shares are cheap for a reason. The FSS, Korea’s financial regulator, identified 54 companies at the end of last year that need restructuring, including 14 construction firms and 4 shipbuilders. Those two industries will remain unattractive for investors, according to Cho Hyeon Seon, head of equity management at Hyundai Investments Co., which manages about 11 trillion won.

"They are no longer growth engines for Korea," Cho said. "They already lost price competitiveness against their overseas rivals."

By contrast, South Korea’s consumer companies are growing into regional players, building brands globally, especially in China and Southeast Asia, said JJ Park, the head of Korea equity research at JPMorgan Chase & Co. Shares of Nongshim, whose sales in China probably jumped 28 percent in 2015 according to SK Securities, increased 74 percent in Seoul trading last year. Lotte Chilsung Beverage Co. surged 49 percent as its soda sales in China jumped 191 percent in November.

“Consumer staples, such as cosmetics, foods, beverage and daily necessities are promising sectors,” said Nam Dong Woo, head of equities in Seoul at Eastspring Asset Management, an affiliate of the U.K.’s Prudential Corp. that manages $105 billion. "When an economy slows down, people tend to be focused on personal taste and instinct."

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