Investors in South Korea See Opportunity Amid Chaos

  • Frontrunners for president pledging changes to conglomerates
  • Improvements in governance, dividends being ignored: Invesco

South Korea’s Family-Run Conglomerates Are Under Pressure

South Korean stocks have shown they can overcome a corruption scandal that claimed the scalp of the president, Chinese economic sanctions and nuclear tests by the nation’s northern neighbor.

Next up: a proposed overhaul of the sprawling conglomerates such as Samsung Group and Hyundai Group that propelled the country’s economic development.

The two frontrunners in the May 9 presidential election -- Moon Jae-in and Ahn Cheol-soo -- are both pledging to reform the chaebol, the biggest 10 of which own more than a quarter of all Korean business assets. The prospect of tearing apart these entities could create uncertainties and weigh heavily on the companies’ stocks in the short-term. But investors are hopeful any overhaul will result in more money being paid out via dividends and more efficient corporate structures, rather than measures that hurt companies’ bottom lines.

Read more: Time for Change? - a QuickTake on South Korea’s chaebol

“The ousting of President Park Geun-hye from power has removed uncertainty, with expectations the new administration will generate momentum for some corporate reform,” said Stuart Parks, a fund manager at Invesco Asset Management in Henley-on-Thames in the U.K. “We’ve maintained a significant exposure in South Korea, as we believe that improvements in corporate governance and dividend payouts are generally being ignored.”

Parks’ Invesco Perpetual Far Eastern Investment Series - Asian Fund has returned 51.5 percent over the past year to beat 97 percent of its peers.

The reform optimism is coinciding with a wider rally in emerging-market shares and a revival in South Korean exports. Overseas sales rose for a fifth month in March after declining in 21 of the previous 22 months.

All of this is luring foreign funds, which pumped a net $3.1 billion into Korean stocks last month, the most since July 2016. The Kospi index is more than 8 percent since the end of November and reached the highest since 2011 last month.

Expectations for more transparent governance of the chaebol are growing, which could eventually mean more money gets returned to shareholders, said You Seung-Min, chief strategist at Samsung Securities Co. in Seoul.

Moves by Samsung Electronics Co. to pay out more in dividends and a proposal to create a holding-company structure suggest the process is already under way, said Invesco’s Parks. It could lead to “a re-rating of the Korean stock market over the medium term,” he said.

Not Easy

The shift for companies may not be so smooth amid political turmoil. Samsung shares fell last month after Vice Chairman Kwon Oh-hyun said the company isn’t considering a stock split and any move toward a holding company “doesn’t look easy” at this time.

The optimism over bigger dividends is dovetailing with rising earnings at Korean companies and relatively low valuations. After-tax profit for Kospi companies is projected to more than double over the next 12 months, according to Bloomberg data. The Korean gauge’s 12-month price-to-earnings ratio is 9.7, compared with 13.7 for the Taiwan Stock Exchange Weighted Index and 13.3 for the Shanghai Composite Index.

Sean Taylor, chief investment officer for Asia Pacific in Hong Kong at Deutsche Asset Management, said he was most positive on South Korean and Chinese stocks among emerging markets because of corporate governance improvements.

The Korean government is starting to put pressure on the chief executives to run their companies better, he said. “If you don’t pay dividends you get taxed more.”

— With assistance by Sam Kim

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