South Korea: Why we're wary of Australia's fourth-largest trading partner
“While most investors hold an 18.5% index weight towards South Korea in accordance with the benchmark, our exposure remains perennially lower”- By Samir Mehta, Senior Fund Manager, BT Wholesale Asian Share Fund – from BTIM Market Insights
Below summary of article written by Chris Walker
Our below-benchmark exposure to South Korea is often questioned by clients. They ask – aren’t there well-known companies, renowned brands or industry-leading businesses to invest in? Isn’t that a very big risk we take deviating from the benchmark?
Three of the four reasons why we worry about the South Korean economy and structure, and are underweight South Korean equities, are:
China can no longer do the ‘heavy lifting’ for South Korea. While South Korean companies have been very good at capitalising on China’s growth, many have also become dependent on it – and as the Chinese economy slows, so too therefore does South Korea’s.
The Korean banking sector is in a poor state. Korean banks are focused on loan growth and market share rather than prudence or return on assets. An investment in any of the Korean banks over the past 15 years would have lost you money.
Thirdly, Korean companies can be risky for minor shareholders. It’s a sweeping generalisation, but there appears to be an abject lack of any respect for the cost of capital or minority shareholders in Korea.
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Frequently Asked Questions about this Article…
The exposure to South Korean equities is lower than the benchmark due to concerns about the country's economic structure, including its dependency on China's slowing economy, the poor state of its banking sector, and the risks faced by minor shareholders in Korean companies.
China's economic slowdown affects South Korea because many South Korean companies have become dependent on China's growth. As China's economy slows, it impacts South Korea's economic performance as well.
The Korean banking sector is in a poor state, focusing more on loan growth and market share rather than prudence or return on assets. This approach has led to poor investment returns over the past 15 years.
Korean companies are considered risky for minor shareholders due to a perceived lack of respect for the cost of capital and minority shareholder interests, which can lead to unfavorable outcomes for smaller investors.
While deviating from the benchmark exposure to South Korea might seem risky, the decision is based on careful analysis of the economic challenges and structural issues within the country, which could pose greater risks if not considered.
While South Korea is home to well-known companies and industry-leading businesses, the broader economic and structural concerns make it important to carefully evaluate individual investment opportunities.
Investors should consider the dependency on China's economy, the state of the Korean banking sector, and the risks associated with minority shareholder rights when investing in South Korean equities.
Investors can mitigate risks by diversifying their portfolios, staying informed about economic developments, and carefully selecting companies with strong governance and respect for shareholder interests.
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