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08 May 2018
by Matthew Vaight
After a historic summit between the leaders of North and South Korea in April, hopes for a permanent resolution of hostilities on the Korea peninsula are as high as they have been for years.
The diplomatic rapprochement and prospect of denuclearisation aside, I believe there are reasons to be optimistic about South Korea – without getting carried away by premature talk of companies set to benefit from any reunification efforts.
I find the progress being made in the country’s corporate culture very promising for long-term investors.
The rise of the South Korean economy, today the 11th largest in the world according to the International Monetary Fund, has been stellar. The IMF expects income per person to exceed US$30,000 this year – almost three times the global average, and higher than Spain’s.
Much of this progress has been driven by companies -- like Samsung Electronics and Hyundai -- that have become household names around the world. But despite their successes, the shares of South Korean companies have historically traded at lower prices than peers in other markets, even in Asia.
This so-called Korean discount is often attributed to investor concerns about how firms are managed. The family-run conglomerates, known as chaebol, which dominate the economy, are noted for lack of transparency, and it is uncontentious to say that the interests of minority shareholders have not always been prioritised.
However, recently there have been some encouraging developments. Following pressure from the South Korean government, certain prominent companies have introduced governance changes designed to improve relations with their shareholders and tackle perceptions of corruption and nepotism.
One of the reasons I take a favourable view of the market is the potential for other Korean companies to follow suit and improve their governance standards. With greater accountability to shareholders, one would expect their interests to be better represented in boardrooms.
Pressure for more shareholder-friendly policies has grown over time. While foreign investors have long been calling for change, more recently Korean investors, too, have expressed a desire for better returns on their investments. Domestic voices are arguably harder to ignore.
Progress is being made, and it can be charted by the sharp rise in corporate profits being shared with investors. The value of cash dividends distributed by South Korea’s largest companies has nearly doubled over the past five years.
But despite this budding dividend culture, Korean companies generally still share less of their profits with investors than their regional peers elsewhere in Asia. I believe there is therefore scope for rising dividend income -- which one would expect to be reflected in higher share prices.
Recent performance has been strong for investors overall. South Korea was one the best performing emerging markets in 2017, delivering total returns of 48% for the year, versus 38% from the benchmark MSCI Emerging Market index, in US dollar terms.
Even after the recent rise in share prices, I continue to believe that South Korea holds exciting opportunities for ‘value’ investors – those looking to buy company shares perceived to be cheaper today than they deserve to be, in the hope that their fundamental value will be reflected in future share price rises.
With momentum behind improving corporate governance, and with focus on shareholder interests growing, I am optimistic that the Korean market presents attractive opportunities for long-term stockmarket investors.
Please remember that past performance is not a guide to future performance. The value of investments goes up and down and will fluctuate over time, and you may not get back the original amount you invested.
The views expressed in this document should not be taken as a recommendation, advice or forecast. We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.