As China Clamps Down, South Korea Embraces Capital Outflows
(Bloomberg) -- While China may yet be some time away from giving its big investors freer rein to put money overseas, neighbor South Korea is embracing the concept of diversifying abroad to boost risk-weighted returns.
As workers in Asia’s no. 4 economy ramp up savings before a rapid rise in the aging society’s retirement rolls, some of South Korea’s biggest investors see danger in keeping all the money at home. That’s all the more so since below-target inflation helped pull down long-term Korean bond yields. The country’s pension funds and insurers say they’re looking for opportunities abroad.
"We expect Korean life-insurance companies to increasingly divest from some of their longer-dated domestic bond holdings in favor of higher-yielding foreign assets,” said Karan Talwar, Hong Kong-based investment specialist for emerging-market debt at BNP Paribas Asset Management. Changing regulations "are making it easier" for them to go abroad, he said.
Among the changes:
- Starting last June, the Financial Supervisory Service, South Korea’s main financial regulator, let insurers count the duration of foreign holdings against their liabilities without costly currency hedging
- The maximum duration -- a measure of the maturity of an investment -- allowed for insurers was extended by the FSS to 25 years in December, from 20 years before, and will be stretched to 30 years at the end of 2018
- New international standards known as IFRS 9 will make it tougher to hold domestic structured products and enhance the relative attraction of long-duration foreign bonds, Goldman Sachs Group Inc. says
- Legislation is pending to remove a 30% foreign cap on insurers’ assets
Korean life insurers’ overseas assets could more than double by 2022, to $280 billion, with annual outflows of $40 billion a year by then, Goldman analysts including Seoul-based Goohoon Kwon wrote in a March 14 note. While he didn’t offer an estimate for pension funds, those too are heading abroad to diversify.
Overseas securities held by Korean investors have increased every year since 2012 to $421 billion at end-2017, according to data from Bank of Korea.
“Investing with a home bias can be a risk, considering the fact the AUM of NPS is estimated to increase to about 2,500 trillion won ($2.3 trillion) by 2043,” said Chi Young Hye, a spokeswoman for the Jeonju-based National Pension Service, an amount that well exceeds the size of the current-day economy.
The NPS’s asset allocation plan for 2018 features almost 22 percent dedicated to overseas equities and bonds, and 12.5 percent in alternative investments, which includes projects abroad.
The Public Officials Benefit Association, which manages about 11 trillion won in savings for local public officials, expects assets abroad to climb to 41 percent of the total this year, from about 36 percent at the end of 2017. And that’s not going to flow just into U.S. dollar assets, Chief Investment Officer Jang Dong-hun says.
"The portion of dollar-denominated assets is very big at the moment for us -- we are intentionally trying to invest in other major currencies," Jang said. POBA is "conservative" on emerging markets, with leverage being one concern, Jang said. The group tends to take a more conservative approach -- by, for example, sticking with the senior or mezzanine tranches of commercial real-estate holdings.
Among insurers, Shinhan Life Insurance Co. is one that confirms its share of foreign assets is climbing, though a representative of the firm declined to be more specific than saying it’s on the hunt for long-term investments overseas.
While hedging costs going into dollars haven’t been cheap thanks to a leap in Libor rates, long-term investors may have more stomach for going without protection. Some 67 percent of life insurers’ liabilities have a duration of over 20 years, according to Bank of Korea estimates cited by Goldman Sachs, so they’re on the look for long-dated assets.
And there’s still a hedge involved.
Diversification to overseas is “a good way to hedge North Korea risks,” said Young Sun Kwon, a Hong Kong-based senior economist at Nomura Holdings Inc. “If you can invest overseas on an unhedged basis, that’d be good protection for Korean pensions.”
©2018 Bloomberg L.P.