Why Investors are Wary of Korea's New President
Um Tae-jong is CIO and COO for global investments and financial products at Samsung Investments in South Korea.
He spoke with AsianInvestor about the change in the nation's politics, with the presidential inauguration last week of conservative, chaebol-friendly Lee Myung-Bak. Lee is a 66-year-old known as "The Bulldozer" from his days as both CEO of Hyundai Construction as well as his term as Seoul's mayor. He has pledged to reverse what he considers his predecessor's soft stance towards North Korea, to repair diplomatic ties with the United States, and to focus on boosting economic growth, claiming that Korea's economy has underperformed.
He succeeds Roh Moo-hyun, a younger leader who attacked chaebol corruption but failed to uproot these powerful conglomerates. Notably, some of Lee's candidates for his cabinet have been accused of corruption.
AsianInvestor: Is the election of Lee Myung-Bak really good for business?
Um Tae-jong: He's definitely business-friendly, given his background as the CEO of Hyundai Construction. The construction industry is different from manufacturing or IT. The CEOs of construction companies know how to act. They don't talk, but they act. They're good at implementing things.
And that's a good thing?
That kind of characteristic, of being a CEO, could jeopardize his government's fiscal policies. He's promised the Korean public to provide them with '747'. That means he has pledged to achieve 7% GDP growth, to raise per-capita income to $40,000 and to make Korea the seventh-largest economy in the world. Korea's growth rate in 2007 was just above 4%. There's no way it can reach 7%. Lee's now saying maybe we'll get to 6%.
But surely it's good to want the economy to succeed.
Lee's biggest political agenda was '747', which boils down to making Korea richer by stimulating the economy and business, and by deregulation. That's fine but Lee's trapped by his own political promises. This could be counter-productive if the market doesn't help him. People must take the '747' promise as a symbolic number, not as a real number. Of course many people realise it's not attainable but others believe in the new president's capability. They could end up very disappointed.
What will happen regarding deregulation?
The new government has hired David Eldon, the former head of the Dubai International Financial Centre and former chairman of HSBC, as an advisor on deregulating the Korean financial system. Lee wants to deregulate and to lower corporate taxes. These policies have led critics to think he's supporting the chaebols but not ordinary citizens.
How has the financial market reacted?
It supports these measures but it hasn't responded to Lee. The market has moved independently of his promises. But investors know Lee's agenda will favour sectors like property, construction and construction-related areas like basic materials.
Are valuations in these areas attractive?
People see growth potential because the government will spend a lot of money to implement its promises. That's a long-term impact, not a short-term one. So we should be over-weight these areas but in the short run, this doesn't factor in our stock picks. You still have to look at each company and its price.
What sectors might suffer?
[Laughs.] Good question. Maybe consumer staples?
What other themes are driving the Korean equity market?
The stockmarket will be volatile and trade within the 1,600-1,800 range. Many people who invested last year will realize profits when the index nears 1,800, and they'll redeem. There will be plenty of buyers when the index falls toward 1,600. This trading is based on local psychology.
What about foreign investors?
They have been selling Korea for the past two months because of their own liquidity issues. Net outflows since the start of the year have reached $10 billion. Foreigners made big returns in 2007 from this market and if they need to redeem from Asian markets, Korea's the first place to realize profits. Foreign investors generally don't see positive fundamentals here so they've been shorting the market.
So is the Korean stockmarket in trouble this year?
No, I don't think so. Some investors have returned in the past week or so. Once they have some visibility on the US economy, and are confident that Asia has separated from any US recession, they will look here. They'll see that Korea has become cheap in terms of price-earnings ratios and price-to-book ratios, and looks attractive compared to India and China. Already we're seeing inflows in the cash and futures markets. And domestic institutional investors are still buying local equities.