Korea benefitting from industry leadership shift away from Japan and towards China
HyungJin Lee, manager of the Baring Korea Trust, has stressed that the risk/return profile of the country presents a strong investment opportunity for 2012, as the country is set to benefit from increasing export demand from both emerging and developed markets.
HyungJin Lee explains, "Korea is a small country with some extremely large and powerful global brands. It is in a similar position to that of Japan in the 80s. Provided global growth continues, the risk/return characteristics of the market and the earnings growth potential look incredibly attractive, with export demand on an upward trend. Companies whose earnings depend largely on global demand make up a very large proportion of the Korean stock market, while the strength of the Japanese yen is giving Korean exports a competitive advantage over their Japanese equivalents."
HyungJin highlights that Korea is currently in a sweet spot in terms of industry leadership, and is benefitting from a gradual catching up with Japan in certain key sectors. One of the themes HyungJin is utilising in the fund is this idea. He says: "For example, in the car industry we have seen Hyundai gain on Toyota in terms of brand and market share. The same can be said of Samsung in the smartphone and other sectors. Over the next decade, we'll see further gains by Korea in these and other key value-added sectors as market leadership shifts. The changing technology landscape is having a major impact on the stock selection of the fund as the smartphones/tablet market quickly grows ever larger. Korea benefits from its very strong broadband penetration which will become increasing important as web technologies continue to expand."
Another area of interest to the fund is that of Korean overseas constructors which are receiving a large amount of interest from the Middle East, in particular.
The Korean market is still one of the cheapest in the region, with further earnings downgrades already priced in. Barings remains committed to the market across its regional Asian equity and Global Emerging Markets portfolios. Speaking on the uncertainty that has resulted from the death of Kim Jong Il and succession of Kim Jong Un in North Korea, HyungJin concludes: "Given the strong valuation support in the market, we are willing to live with the short-term market volatility that comes with political change and the 'Korean discount', which exists due to the tensions in the peninsula. We will continue to monitor the situation carefully however, and would be likely to reassess our position if the transition of power became disorderly."
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