Teflon South Korean Stocks Still Judged Cheap After Record High

  • Kospi tops May 2011 high despite nuclear rattles, politics
  • Investors bet nation’s equities to climb as trade offers boost

South Korea’s stock market is showing the naysayers who’s in charge.

Threats of a North Korean nuclear test, an impeached president, sanctions from China and exploding Samsung phones couldn’t stand in the way of the country’s benchmark equity gauge hitting a record high Thursday. Investors from ABN Amro Private Banking and Robeco Groep NV are betting the shares will climb further thanks to rising global trade, with the cheapest valuations among the world’s biggest markets luring inflows from overseas.

While profits are forecast to double over the next 12 months and optimism about an improvement in corporate governance has risen, by some measures South Korea’s market remains under-invested by global funds, leaving room for further advances.

“Korea is a big beneficiary of a pickup in the global economy,” Richard Titherington, chief investment officer and head of emerging markets at JPMorgan Asset Management, which oversees about $1.8 trillion, told Bloomberg TV in Hong Kong. “It’s a cheap market and it’s got this earnings momentum behind it.”

Didier Duret, the Amsterdam-based chief investment officer at ABN Amro Private Banking, is another who sees South Korean stocks benefiting from an upturn in trade and is looking past uncertainty fueled by the Communist North Korean regime’s arms program.

“The tensions with North Korea are not new and are less relevant for the markets than the positive economic and earnings fundamentals," said Duret, who oversees 209 billion euros ($228 billion).

While South Korea’s market has among the lowest payout ratios in the world, they are rising. Many are betting on reform of opaque corporate governance at so-called chaebol, the typically family-controlled conglomerates that account for almost three quarters of the main index’s market capitalization.

The benchmark Kospi index climbed 1 percent to close at a record 2,241.24 on Thursday.

South Korean economic growth was faster than economists expected last quarter as a recovery in exports supported investment. The data came ahead of next week’s presidential election, which was triggered by the constitutional court’s unanimous decision to uphold the impeachment for former president Park Geun-hye.

Read more on South Korea’s presidential hopeful here.

For some investors, security tensions offer plenty of reason for cheap relative valuations.

“You do have a lot of geopolitical issues,” said James Soutter, who oversees the equivalent of about $518 million as a fund manager at K2 Asset management in Melbourne. “Just because it’s structurally cheap, it’s cheap because of reasons such as corporate governance issues and reporting issues.”

Low allocations to South Korean stocks held by foreign investors may leave room for gains when these money managers return, says Lee Chai-won, chief investment officer at Korea Investment Value Management Co. in Seoul. The country remains one of the largest underweights of emerging-market focused funds, data from EPFR, a research firm, show.

Foreigners have bought just $6 billion of South Korean shares this year, less than they’ve put in Taiwan or India, according to data compiled by Bloomberg.

A surge in Samsung Electronics Co. has contributed more than 100 points to the Kospi’s advance in 2017. The phone maker’s shares have advanced 26 percent this year to a record, with profit topping estimates. Samsung continues to be the poster child for an economy that saw exports jump the most in years last month.

Over in Hong Kong at Robeco, one investor says money managers will be forced to reassess.

“It doesn’t make sense to be very underweight in a country that is so extremely undervalued,” said Arnout van Rijn, chief investment officer in Asia for Robeco, which manages 281 billion euros ($306 billion). “Against the background of a bull market, Korea is also likely to continue higher.”

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