Optimistic investors bet on Korean recovery

17-Jan-2017 Intellasia | FT | 6:00 AM Print This Post

Political upheaval looks set to force the country to try and reform its chaebols

South Korea, home to corporate electronics giants Samsung and LG, last year became embroiled in a vast political scandal that resulted in its parliament voting to impeach the country’s president.

The political upheaval has caused problems for the heads of South Korea’s most important companies, family-controlled conglomerates known as chaebol, who were called to testify in a parliamentary inquiry into the scandal in December.

The chaebol were caught up in the affair because of donations they made to foundations linked to President Park Geun-hye’s close friend and adviser, Choi Soon-sil, who is at the centre of investigations. President Park has been accused of abusing her position by helping Ms Choi secure the donations.

Asset managers are hopeful, however, that the scandal could result in significant improvements in governance standards, which could help restore South Korea’s standing in the eyes of the international investor community.

Despite the global prominence of the chaebol, emerging market investors only allocate 11.9 per cent of their assets to the country, compared with the MSCI EM index benchmark weight of 14.2 per cent, according to EPFR, the data provider.

Corporate governance issues have been named as one of the reasons for this underweighting. While many companies within a chaebol are usually listed, they remain under family control, and have been criticised for failing to listen to the interests of minority shareholders.

“[South Korea] has historically been relatively unloved, partly for governance reasons,” says Julian Mayo, co-chief investment officer at Charlemagne Capital, a specialist emerging markets asset manager.

“Society is looking more closely at the behaviour of the chaebol, which should be good news. There is a growing assertiveness of independent shareholders.”

Corporate governance issues came to the fore in 2015, when Elliott Associates, the US activist hedge fund company, entered a high-profile spat with Samsung over the proposed merger of two companies owned by the electronics conglomerate. Elliott claimed the merger would only benefit the controlling Lee family.

In 2014 Hyundai, the carmaker, also came under fire from shareholders when it agreed to pay $10bn, together with two affiliates, to buy land in central Seoul from a company that was majority owned by the South Korean government.

The price paid was reported as being more than double the next-highest bid. The market capitalisation of Hyundai and the two affiliates – Kia Motors and Hyundai Mobis – fell by $8bn on the announcement of the deal, which investors feared would reduce the potential for dividends.

The most recent scandal has encouraged renewed scrutiny of the relationship between the political establishment and the country’s corporates, and has weighed on the Kospi index, the representative stock market index of South Korea. The index fell to a three-month low on December 5, the day before the chaebol hearing, but has since recovered.

Funds invested in South Korea have continued to suffer outflows. Since October 26, two days after JTBC, a local broadcaster, broke the story of the corruption scandal, international investors have pulled more than $700m out of the country, figures from EPFR, the data provider, show.

Opposition parties, which increased their control of the National Assembly in parliamentary elections held in April 2016, have proposed legislation to curtail the influence of the chaebol.

The legislation was dropped while assembly members focused on President Park’s impeachment proceedings, but may be picked up again if a new president is elected. Although the National Assembly voted to impeach Ms Park last month, her impeachment is still subject to approval by the Constitutional Court. If it is upheld by the court, presidential elections will be held within 60 days of the ruling.

January Dehn, head of research at Ashmore, the UK-listed asset manager that focuses on emerging market debt, believes the political upheaval presents a clear “buying opportunity” for investors in South Korea.

“Institutions in Korea will handle this very efficiently. There is no reason to be permanently bearish on Korea. A new government will mean the country as a whole can move on, and so new elections will be a positive development,” he adds.

The pace and scope of reforms to the chaebol depend on whether they are ultimately perceived as victims in the scandal – left with little choice but to give money to Ms Choi, who they saw as hugely influential – or co-conspirators. During the parliamentary hearings, the heads of these companies said they were not seeking favours.

“If they are thought of mainly as victims, then most of the focus of reform will be more likely to shift in the direction of constitutional revisions designed to curtail the president’s powers,” says Scott Seaman, a senior analyst at Eurasia Group, a consultancy that advises investors on political risk.

“If, on the other hand, the chaebol end up being seen as the source of the problem instead of being caught in Ms Choi’s web, then there will be more political pressure to change the presidency and the chaebol.”



Category: Korea

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