Look to Beijing Not Pyongyang for Cues on South Korean Stocks

(Bloomberg) -- South Korea’s improving relationship with China is far more important for the country’s stock market than the evolving detente with North Korea, according to Franklin Templeton Investments.

Kim Jong Un will be the first North Korean leader to set foot in the south when he crosses the border on Friday for an historic meeting with President Moon Jae-in. While the easing of tensions may eventually benefit South Korean infrastructure companies, the mending of ties with China is the main reason the fund manager has become more bullish on Korean stocks, said Chetan Sehgal, director of portfolio management for emerging markets equity.

“The South Korea-China relationship is critical and vital,” Singapore-based Sehgal said in an interview. If relations with North Korea improve, “it’s a bonus,” he said, adding that Franklin Templeton was “slightly overweight” Korean stocks.

South Korea’s relationship with China -- its major trading partner and largest source of visitors -- soured over the last few years due to Beijing’s dissatisfaction with Seoul’s decision to deploy a missile defense system with the U.S. The relationship has improved recently, with President Xi Jinping’s special envoy Yang Jiechi telling President Moon on March 30 to expect “visible accomplishments” in bilateral economic issues.

The number of Chinese tourists visiting South Korea rose 13 percent in March from a year earlier, the first increase in a year. The Kospi index has climbed almost 6 percent from this year’s intra-day low on Feb. 9, with tourism-related stocks such as AmorePacific Group Ltd. among the better performers.

Franklin Templeton had increased its weighting to South Korean stocks over the last few months, Sehgal said. The mending relationship with China makes it “far more interesting” and the fund manager also sees “a glimmer of hope” that corporate governance reforms will lead to meaningful change, he said.

©2018 Bloomberg L.P.

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