Top Invesco Fund Favors Korea as Foreigners Gobble Up Stocks
(Bloomberg) -- After suffering their worst year in a decade, South Korean shares are now back in vogue.
Foreigners have invested more than $2.8 billion net in the nation’s stock market this month, poised to be the largest inflow since March 2017. That’s the biggest buying spree in Asia after China, data compiled by Bloomberg show. More than 2.4 trillion won ($2.1 billion) went into the country’s two biggest stocks, Samsung Electronics Co. and SK Hynix Inc.
For bargain hunters like William Lam, the co-head of Asian and emerging-market equities at Henley Investment Centre at Invesco Ltd., the stock market of Asia’s fourth-largest economy is a buying opportunity because it’s so cheap. That’s even considering risks such as lower earnings estimates and the U.S.-China trade conflict, he said.
“The market is overly discounting the cyclical nature of its economy and generally perceived poor corporate governance,” Lam said. Invesco oversees $888 billion globally, and his Invesco Asian Equity fund, which follows a contrarian strategy and is overweight Korean stocks, has beaten most of its peers in the past three years. “We view this as a source of opportunity to own operationally solid companies with good balance sheets, and with an ability and desire to improve shareholder returns over time.”
The inflows into Korean equities contrast with the sell-off in its bond market. Foreign investors have pulled $1.5 billion in January, the most in the region, as a slump in currency-hedged yields diminished the allure of the nation’s securities.
Among his Korean holdings, Lam owns banks, an insurer, a tech company, an electric-power utility, as well as manufacturers of steel, autos and chemical products. He declined to mention specific names due to his firm’s policy. Despite uncertainty over memory-chip demand in the near term and falling prices, he is optimistic about the nation’s semiconductors.
In fact, semiconductor shares helped boost the Kospi index this month, sending it up 6.5 percent, on track for its best monthly advance in seven years. Samsung Electronics and SK Hynix, the gauge’s two biggest components, have rallied more than 16 percent. And yet, the benchmark’s valuation of 0.9 times price-to-book ratio is still below its five-year average and lower than the multiple for the MSCI All-Country World Index.
While the nation’s corporate-reform initiatives haven’t been that “meaningful” so far, Lam is still encouraged by recent efforts to improve governance. The National Pension Service, the country’s largest pension fund, has adopted a stewardship code, and foreign investors have shown “significant” interest in how the fund would exercise its shareholder rights, said Park So-yeon, a strategist at Korea Investment & Securities who met with U.S. investors recently.
The government may be also be easing some rules in favor of corporations ahead of general elections in 2020, Park said. For example, it might relax the 52-hour working system, slow increases in the minimum wage and approve more large-scale infrastructure projects, she said. That could all lead to equity gains.
“We accept that this is a gradual and cultural change that may take a number of years to bear fruition,” Lam said. “That said, the ‘Korea discount’ being reflected in current valuations is significant, suggesting little potential for improvement, with the likelihood that even a small signal of change could help trigger a substantial re-rating.”
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