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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