Aberdeen Favors Korea Stocks as Foreign Funds Look Past Politics

  • China recovery, commodities rebound counter weakness in Korea
  • Strong yen prompts foreign funds to switch into Korean stocks

An election upset, rising joblessness, a slowing economy. Global funds say it will take more than that to keep them away from South Korea’s rallying stocks.

Overseas investors including Aberdeen Asset Management Plc are snapping up shares at the fastest pace in almost a year, sending the Kospi index 10 percent higher since mid-February. Rebounding commodities and higher demand in China are outweighing political upheaval in Korea. Meanwhile, emerging markets in Asia are soaring as investment flows shift away from Japan because of a stronger yen.

“South Korea is starting to look attractive,” Yoojeong Oh, a Singapore-based fund manager at Aberdeen Asset, which oversees over $400 billion globally, said by phone. “It’s traditionally a stock pickers’ market.”

Foreigners have poured $4.9 billion into the nation’s equities since the start of March, with the benchmark Kospi index posting its best month in almost a year to erase losses in 2016. Optimism that China’s economy is stabilizing has pushed metal and energy prices higher in recent weeks, spurring gains in Korea’s producers. 

The Kospi Iron & Metal Products Index of 44 stocks has rallied 22 percent this year, the most among 19 industry groups. Posco, South Korea’s largest steelmaker, has soared 41 percent in 2016.

China’s economic rebound gathered pace in April, according to the earliest batch of private indicators for the month. Economic gauges from four providers all increased in April from March, while sub-indexes for employment showed stronger demand for workers.  

About $11 billion of international funds have flowed into five out of eight Asian markets tracked by Bloomberg this year, including Korea, India and Taiwan. The capital flows are reinforcing the case that Korea’s stock gains has more to do with foreign factors rather than issues at home. China’s focus on investment and improving data in U.S. manufacturing will lead to more active foreign funds into Korean markets, according to Cho Byung Hyun, a strategist at Yuanta Securities Korea.

"So far, most foreign funds entering Korea seem to be passive funds, taking profits from foreign exchange, not betting on Korea’s fundamentals," said Cho. "But expectations are rising that there could be more active funds coming to the country, as China is shifting its focus into investment and U.S. manufacturing sector is likely to rebound, boosting global trade.” 

The inflows are coming at the expense of Korea’s neighbor to the east. Overseas fund managers pulled $50 billion from the Japanese stock market this year as concerns grew that a stronger yen will erode the competitiveness of Japanese cars and electronics versus those made by South Korean rivals. The won has fallen more than 2 percent versus the yen this month.

Switching Out

"We’ve seen a switching out from Japan and into South Korean equities on the back of the currency movements," said Kelvin Tay, regional chief investment officer at UBS Group AG’s wealth management business in Singapore. "As the yen continues to strengthen, you’ll see South Korean exporters actually benefiting from that.”

The MSCI Emerging Markets Index has risen 5.8 percent this year, compared with a 1.7 percent gain for the MSCI All Country World Index. The Kospi is up 3 percent while Japan’s Topix Index has slumped 10 percent.

“Korea is rising along with the rest of the emerging world. There’s a recovery across Asia, and the numbers in China are improving, so that helps all the stock markets across the region,” David Gaud, a portfolio manager at Edmond de Rothschild Asset Management, said by phone. “It could carry on as we continue to see positive data from China.”

The gains in Korea are coming despite mounting concerns about the domestic economy. Data on Tuesday showed gross domestic product slowed in the first quarter as sluggishness in exports weighed on corporate investment and consumers cut back on spending. The unemployment rate for young people touched a record high in February. Growth is forecast to slow to below 3 percent this year.

BNP Paribas Asia Pacific recently downgraded Korea to neutral from overweight, said Manishi Raychaudhuri, its Hong Kong-based Asian equity strategist, who cited the recent deterioration in the growth environment. Its economists also cut its 2016 growth estimate to 2.4 percent from from 2.7 percent. Gaud and UBS’s Tay have neutral ratings given the weak prospects for earnings.

Reform Stalls

The gloomy outlook for the economy played a part in the defeat of the ruling party in April elections. Voters denied President Park Geun-hye’s Saenuri Party a majority in a parliamentary vote when the opposition Minjoo Party won 123 seats in the 300-seat National Assembly. 

The setback is likely to hurt efforts by Park to push through bills to reform the labor market, boost service industries and enhance cybersecurity. Her government had also sought to ease rules in financial markets and implement restructuring of industries such as shipping to help weather a global slump. 

While Park’s reform agenda may take a back seat, Aberdeen’s Oh says there are more well-managed companies that she can invest in, compared with family-controlled conglomerates known as chaebols.

“Companies in the healthcare, cosmetics and Internet sectors have professional management teams and are investing into their future growth, branding and distribution,” said Oh. Aberdeen owns shares of cosmetics maker AmorePacific Corp., a maker of skin care, make-up and fragrance products that skyrocketed more than 200 percent over the past two years. “Most of them are maintaining good balance sheets and clean structures, unlike the chaebols.”

Ben Surtees, a London-based fund manager at Jupiter Asset Management Plc, is shrugging off the economic and political uncertainty. He sees strong prospects for Coway Co., the South Korean company that sells water purifiers door-to-door.

“We de-emphasize the macro environment and focus on finding good companies irrespective of who’s leading the country,” said Surtees.

Before it's here, it's on the Bloomberg Terminal.