Low Valuations Spell High Returns in Korea as Commodities Rally

Updated on
  • Posco stages comeback as rally in cosmetic stocks cools
  • ``Growth stocks rose too much,'' Shinyoung Asset's CIO says

South Korea’s beaten-down steelmakers, contractors and shipbuilders are starting to attract investors with their low valuations as stability returns to commodity markets and the world economy.

Posco, Korea’s largest steelmaker, has soared 49 percent in 2016 after a record plunge last year, while Hyundai Engineering & Construction Co. has jumped 44 percent following the steepest annual slump since the 2008 global financial crisis. After three years of gains, stocks focused on demand from Korean consumers and Chinese tourists, such as cosmetic companies, are losing steam after valuations got ahead of earnings prospects. 

“Over the past three years, growth stocks have outperformed value stocks," said Huh Nam Kwon, the chief investment officer at Shinyoung Asset Management, which oversees 13 trillion won ($11 billion). “The situation has now changed. Growth stocks rose too much.” 

The heavy industry giants that built South Korea into an export powerhouse are getting a second look from investors as oil has rebounded more than 50 percent from a 12-year low in February, iron ore has surpassed $60 a metric ton and China’s factory gate prices are rising for the first time since 2013. 

Low-valued stocks are not just oversold, but they are showing “a reasonable turnaround” amid positive signals from the global economy, according to a report from Yuanta Securities Korea Co. on March 28.

Posco is valued at 0.48 times its book value, near a record low, compared with 0.96 for the benchmark Kospi index, data compiled by Bloomberg show. Huh said he added Posco shares earlier this year. The stock jumped 4 percent at the close on Thursday, the highest level since May 2015, while the Kospi surged to a four-month high.

Hyundai Engineering & Construction’s valuation was at the cheapest level in at least a decade on Jan. 6. The stock has rallied 51 percent since then. Hyundai Heavy Industries Co., the world’s biggest shipbuilder, has climbed almost 34 percent after two years of double-digit declines.

Fading Appeal

Meanwhile, on the other side of the spectrum, growth stocks are fading. Cosmax Inc., a cosmetics maker whose price-to-book ratio is the second-highest among stocks on the Kospi, has slumped 30 percent this year after rallying 85 percent in 2015. AmorePacific Corp., which makes skin care, make-up, and fragrance products, is down 2 percent after skyrocketing more than 300 percent over the past two years. A gauge tracking consumer shares on the MSCI Korea Index is the worst performer among 10 industry groups this year, after surging 42 percent in 2015.

"Previously, investors bought any kind of growth stocks, regardless of their sizes,” Kim Kwang Hyun, strategist at Yuanta Securities, said by phone. Now they’re starting to sell some of them, he said.

"In some funds, I sold off cosmetics," Chun Taekmo, a chief fund manager at Hyundai Investment Co. who helps oversee 13 trillion won, said by phone. "I don’t think cosmetics would show the high growth that they showed last year." 

Not everyone is giving up on growth. Ganesh Chidambaram, a Hong Kong-based fund manager at UBP Asset Management Asia Ltd. that oversees 110 billion Swiss franc ($115 billion), likes sectors with high-growth potential. He favors consumer companies with exposure to Chinese tourists.

Kim Hyun Su, a Seoul-based senior fund manager at IBK Asset Management that oversees 1 trillion won, said not all value stocks are “valuable” for investment as Korea’s economic expansion slows. He would be ready to sell them if their fundamentals can’t support valuations, he said.  

Bank of Korea Governor Lee Ju Yeol said last month Asia’s fourth-largest economy is likely to miss the central bank’s initial 2016 growth outlook of 3 percent.

London-based Jonathan Pines, the portfolio manager of emerging markets at Hermes Fund Managers Ltd, said valuations are cheap, adding that he favors Korean financials, chemicals and engineering companies. His $1.5 billion Hermes Asia Ex-Japan Equity Fund beat 99 percent of its peers over the past three years with a 16 percent return.
“Korea is our biggest overweight country exposure, at 20 percent above benchmark,” he said. “We are finding tremendous value in Korea because Korea has a large number of cyclical companies, and it is the cyclical companies globally that are trading at the most attractive valuations.”

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