South Korea makes it to WGBI
This week, FTSE Russell announced the results of its semi-annual bond index review, and the big news are that South Korea will be included in the index provider’s flagship World Government Bond Index. See here.
This is a big deal for bond markets, probably the most widely used global government bond index, followed by an estimated US$2.5tn. According to Goldman, the inclusion should attract ∼$65bn into South Korea’s govvies, driving yields lower.
Why should we care about this as investors in South Korean equities?
For 2 reasons. Firstly, because of the benefits on the wider economy and corporates from easier financing conditions and lower yields. Secondly, and of much greater importance, because FTSE Russell’s inclusion may signal a future move by MSCI to do something similar in equities, i.e. including South Korean equites into its Developed Market Indices (something which FTSE Russell has already done back in 2010).
MSCI’s reclassification could draw ∼US$50bn into South Korean equities, and spark a significant rally.
As noted on the FT, “this might seem like a weird, niche thing only of interest to indexing dorks….but the reality is that benchmarks are increasingly influential in deciding global capital flows, and their importance is only going to grow”.
We view MSCI’s potential reclassification as a pivotal catalyst for South Korean equities.
Clearly this is not the only, nor the most important reason to buy South Korean equities.
As value investors we are mainly attracted to this market for its exceptionally low valuation and discount vs other major markets, with the KOSPI currently trading at 8.5x 2024 EPS and even below book value, vs the ∼2x book value of the NIKKEI, the ∼3.7x of the SENSEX & the almost 5x of the S & P 500. Our South Korean portfolio is even cheaper, trading at an average of ∼6x EPS despite being composed of good quality corporates with relatively low or no debt.
South Korea offers an interesting alternative to the Chinese and Indian stock markets, which trade at much punchier 12x and 24x EPS respectively. Relative to China’s, then, you get these extremely attractive stocks without all the risks associated with its big neighbour, such as regulatory uncertainty, deglobalisation, friend-shoring, Taiwan, a real estate bubble and a financially stressed system.
Unlike the KOSPI, in our portfolios we give significant exposure to companies exposed to the domestic mkt, particularly in the infrastructure and consumer sectors. We reckon these sectors would benefit the most from potential reforms in North Korea along the lines, for example, of what has happened in China or Vietnam in the last 20 years, which could or could not, in the very long term, lead to the reunification of the country. This would represent a significant opportunity for South Korean domestic equities, to which the market is currently assigning a probability close to zero.
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This is a marketing communication intended exclusively for institutional investors. Refer to the Fund Prospectus & KID before making any investment decision.
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