South Korea is beset with macroeconomic problems which are causing managers to re-evaluate their exp...
South Korea is beset with macroeconomic problems which are causing managers to re-evaluate their exposure to the country. In April the country swung to a current account deficit for the first time in 30 months. Industrial output also fell for the third successive month as output from factories fell 2.3% seasonally adjusted in April compared to a 1.7% drop in March.
Alistair Thompson, manager of Edinburgh Pacific unit trust, is already underweight South Korea by 2% and wants to further reduce his 12% weighting to 10% of the portfolio.
The weakening of the currency is a double-edged sword, according to Thompson. He says: "On the one hand a weak currency will mean South Korean exports are relatively cheaper but on the other the value of your investment falls. Edinburgh is in the latter camp."
One factor that swung Edinburgh's decision is that the group is forecasting between 2.5% and 3% GDP growth in the US this year, half of what it was last year, according to Thompson.
One of the stocks Thompson is cutting back on is Samsung Electronics. He says over the longer term the firm has strong fundamentals and it is trading on seven times next year's earnings.
However, he says the trimming of its position in the fund is more to do with an overall cautious view of the market.
He adds; "Samsung is a company owned by many foreign investors' global funds as well as Far East ones. If the managers of these funds have the same fears on Korea as we do then Samsung may be heavily sold."
Thompson's remaining positions in Korea are domestically oriented companies. He favours SK Telecom which grew by 210% in the last quarter of 1999. In the past month the stock rose by 20%.
Thompson identifies a third problem for the market. He says: "The growing bad debt situation among the country's investment trusts is likely to cause significant falls in share prices."
So far this year there have already been significant falls in the level of the Korea Composite index. At the beginning of January it was 1066.18. Since then it has fallen to a 52-week low of 625.14, as at 29 May.
In light of the falling share prices Henderson Investors has increased its exposure to the South Korean economy but is still underweight the market. Heather Manners, a Far East manager at Henderson, says: "The macroeconomic fundamentals are not strong but most of these have been priced into the market. Many companies are trading on two to three times P/E multiples."
The group has steered away from exporting companies and bought into Hyundai, a department store and Hite Brewery.
Manners says: "Consumer spending has been strong but it has not been reflected in share prices.
"It may come off slightly in the third and fourth quarter as Korean exporters feel the effect of a slowdown in the US economy."
Edinburgh thinks Hong Kong is the most attractive of the Far East markets as it has already priced in a 100 basis point rise in US interest rates. Thompson says: "We anticipate a smaller rise which will benefit Hong Kong."
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