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Investing in Korea in the Midst of Turmoil in the Korean Peninsula

Petra Capital Management 2Q 2017 Quarterly Letter, August 4, 2017

  • Up 12.4%, net of all fees and expenses, for the first half of 2017, while KOSPI returned 18% during the same period
  • Performance of KOSPI Index continued to be driven mostly by Samsung Electronics, which comprises about 22% of the index

Market Commentary

  • During Q2, Korean stock market continued to advance despite ongoing concerns on North Korea and its dictator, Kim Jong Un
  • Recent Western media headlines are full of sensational stories such as a possible US preemptive strike on North Korea or Hawaii’s preparedness plan for North Korean missile attack
  • Theoretically, there are a few possible scenarios, including a preemptive strike on North Korea, a removal of the North Korean leader by the US Special Forces, a surgical strike against North Korea’s nuclear facilities or even North Korea’s nuclear missile attack on the US soil
    • But we tend to agree with the analysis by most geopolitical experts which concludes that above-mentioned scenarios are rather unrealistic and have little possibilities
  • Unfortunate reality is that the US has no plausible way of preventing North Korea from advancing its nuclear program. Furthermore, Trump’s hopes of getting China to rein in North Korea have gone unfulfilled
  • Policy of deterrence and containment appears to be the only option for the US at this time
  • Given the fact that North Korea is unlikely to strike first, which it clearly knows is suicidal, believe a risk of war breaking out in the Korean peninsula is almost zero
  • As a result of President Park Geun-hye’s impeachment and subsequent election of President Moon Jae-in, we think that Korea has finally turned the corner in the right direction
    • President Moon swiftly appointed two prominent corporate governance activists/academics to the key government positions – delivering a strong signal to the market that his campaign promise on broad chaebol reform is real and his administration’s priority is on pushing hard for laws to strengthen corporate governance
  • Although the Fed recently hinted a slower pace, it seems inevitable that the US will raise interest rates further. Europe and Japan are a bit behind, but they are likely to follow in the Fed’s footsteps eventually. Korea will be no exception to this situation
    • With the panic amid the taper tantrum back in 2013 becoming a distant memory, the market has been recently behaving as if the rate increase is no longer an issue
    • Given the fact that the valuation of any type of assets, including equities, will be negatively affected by higher rates, we will continue to monitor the rate movement
  • Despite a significant rise in KOSPI Index this year, current Korean stock market is far from being overvalued and we can still find many undervalued stocks
    • According to Korean Exchange, international investors have added $1.5Bn worth of small to mid-cap stocks in Korea since February 2017

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