The Korean market has fallen some 47% in sterling terms for the year ending 30 November as investor ...
The Korean market has fallen some 47% in sterling terms for the year ending 30 November as investor confidence in its restructuring plans wanes. For the year 1998 to 1999, the region returned 10.5%in sterling terms
Ralph Woodford, investment manager at Edinburgh Fund Managers points out that during late 1998 to 1999, Korea was highly favoured because of its corporate restructuring, reduced debt levels, falling interest rates, asset sales to foreign corporations and an economy sensitive to world growth rates.
However, it fell from favour as it seemed as though after the crisis, with Korea achieving growth rates of around 8%, corporations and government alike were becoming complacent.
Woolford says: "President Kim had his focus on the Nobel Peace Price as did his ministers and the government took its foot of the restructuring gas.
"Financial restructuring has been slow, they still have not solved the problem of non-performing loans and bank consolidation. The export economy is slowing very quickly and the domestic economy is not strong enough to compensate for the slowdown in export growth."
Angus Tulloch, head of global emerging markets at Colonial First State says: "Korea tends to be a case of two steps forward, one step back. Companies like SK Corporation and Samsung Electronics were regarded as the two paragons of corporate governance then they performed transactions not perceived to benefit corporate shareholders."
He points out that historically, the Korean economy had the government operating through 20 or so industrial conglomerates, which were given preferential access to capital and in return were expected to perform acts of public service.
"They became large, unwieldy and over-leveraged," Tulloch says. "The government worked hard in 1999 to force them to bring down their borrowings and divest themselves of their non-core assets but the momentum was lost, which was a negative in the past year."
There have also been problems with corruption in government agencies, which has dampened sentiment.
Tulloch agrees that the momentum for financial restructuring seemed to slow down with the government focusing on achieving good relations with its northern neighbour, to the exclusion of getting to grips with the conglomerates companies.
Woodford notes that an additional problem for Korean corporations is that they are still very highly geared compared to the rest of Asia and most of their borrowing is in dollars. As the Korean won weakens, their debt levels become steeper.
"Investors are worried by this," he says. "Investors are looking for positive restructuring news to drive the stock market but confidence is very low and there are better places to put your money."
Tulloch says: "But more recently, things have been looking better in Korea, with a large financial restructuring bill making its way through the assembly."
The semiconductor sector is an important one in the Korean market. According to Woodford, it is currently facing the huge potential of over-supply in memory chips in the first quarter of 2001.
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