Photographer: SeongJoon Cho/Bloomberg

Samsung Snubbed in Foreign Stock Funds' $15 Billion Korea Bet

  • Foreign investors bought $15b in shares, net Samsung sellers
  • Investors bet Moon will strengthen reforms, governance

Investing in the South Korean equity market has taken an interesting turn: look past the Samsung trade.

Foreigners were net sellers of Samsung Electronics Co. even as they bought more than $15 billion of stocks in the past 12 months, helping push the MSCI Korea and Kospi indexes to record highs. Instead of piling into the tech giant, they now favor steelmaker Posco and KB Financial Group Inc. the most, Bloomberg data show.

Betting on Samsung, which makes up nearly a third of MSCI’s Korean measure, has been a profitable strategy over the past two years due to its strong share price performance relative to the index. Even so, foreigners are looking elsewhere for companies with growing earnings and attractive valuations.

The South Korean market has become “much more than Samsung,” said Nader Naeimi, head of a dynamic investment fund at AMP Capital Investors in Sydney.

Global money managers taking a broader approach to investing in Seoul signals a vote of confidence on the nation’s reforms and economic growth. That may narrow the valuation discount that plagues Asia’s fifth-biggest market due to slow progress on corporate governance.

The Kospi index rose as much as 1.3 percent to yet another record high Thursday after Bank of Korea left its benchmark interest rate unchanged and raised its forecast for economic growth this year to 2.8 percent compared to its previous 2.6 percent estimate.

Naeimi’s conviction on the nation increased after the election of Moon Jae-in as president, which he says has improved prospects for more government spending, reforms and corporate governance in an economy dominated by family-run empires known as chaebols. He is bullish on automakers and shipbuilders, and sees technology stocks as “frothy.”

See also: How a hedge fund giant expects a rally at Korea’s largest companies to fade

Broad-based Upgrades

Samsung reported its best-ever operating profit last week, and shares are at a record high. But other Seoul-listed companies are delivering on earnings too. While upgrades to South Korea’s estimated earnings since June 2016 halve to 19 percent after excluding the world’s largest maker of phones and memory chips, the revisions are still the best in 16 years, Credit Suisse Group AG strategist Sakthi Siva wrote in a July 5 note. The bank’s overweight stance is potentially at risk from investors cashing in on the rally, North Korea missile launches and potential trade barriers by the U.S.

North Korean leader Kim Jong Un’s regime has conducted rapid-fire ballistic missile tests in an escalating standoff with the U.S. Yet none of that has seemed to register at the Korea Exchange, where the benchmark Kospi gauge has touched record highs this year.

Read more: One of Asia’s best stock markets is right next to a nuclear nightmare

One-year forward earning estimates have doubled this year for Samsung SDI Co. Ltd., SK Hynix Inc. and LG Electronics Inc., compared with a 69 percent climb in Samsung Electronics, according to data compiled by Bloomberg.

Bets on South Korea are spreading out as there is a “wide opportunity set, including domestic demand stocks,” said Julian Mayo, who helps oversee $2 billion as co-chief investment officer at Charlemagne Capital Ltd. in London. “This is partly because there are some quality businesses in Korea, but also because of the chaebol and other governance reforms under President Moon.”

Charlemagne Capital likes Samsung, but says its clients also hold LG Household & Health, Coway Co. and Hyundai Motor Co. in their portfolios.

If history is any guide, there is room for MSCI Korea ex-Samsung to gain support due to its low price-to-book ratio, Credit Suisse said in its note.

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