According to Nobel Prize-winning economist Simon Kuznets, countries can be categorized into four types: developed, undeveloped, Japan and Argentina. Perhaps he should have added a fifth type: South Korea.
South Korea boasts the 14th largest economy globally and ranks in the top decile worldwide for GDP per capita. It’s a member of the OECD since 1996, while the IMF has classified it as an advanced economy already in 1997. Its stock market is the 12th-biggest globally, with a capitalisation of about $1.8trn, ahead of the likes of Italy and even Switzerland. The country leads the world in R&D investment relative to GDP. The West heavily depends on South Korea for semiconductors, smart phones and smart TVs, while greatly enjoys its pop music, films and food.
Since the 1980s, the country has also transitioned into a modern Western-like democracy, curbing corruption and limiting the economic and political dominance of chaebols.
And yet, despite possessing nearly all the hallmarks of a developed market, MSCI has once again, back in June, reclassified South Korea as an “emerging market”. Click on image below for details.
MSCI is primarily concerned about the convertibility of the Korean won in the currency market and is also unhappy with the full ban on short selling reintroduced in November 2023.
MSCI’s classification as emerging market probably contributes to what is known as the South Korea "discount" – a term describing the underperformance/undervaluation of local stocks compared to other global equity benchmarks.
A discount which is probably also the result of other factors, such as an exaggerated perception of the military threat from North Korea (are investors not investing in German stocks due to its proximity to Russia?); poor corporate governance within South Korean conglomerates; and the inaccessibility of South Korean stocks for non-domestic retail investors.
While we can't predict when (or even if) MSCI will upgrade South Korea to "developed market" status, it's worth noting a couple of things.
First, the country is already, albeit gradually, easing restrictions on the currency market (where the heavy regulatory focus reflects the comprehensible hyper-vigilant mindset forged in the wake of the capital flight and won collapse witnessed during the Asian Financial Crisis of 1997).
Second, while inclusion in MSCI’s Developed Market index is estimated by Goldman Sachs to potentially lure some US$46bn-56bn of fresh capital into South Korean assets, an investment case for South Korea doesn't need to hinge on MSCI's reclassification.
As value investors, our investment case for South Korea is primarily based on valuation.
As of today, approximately 29% of the Korean listed market trades below tangible asset value. This percentage increases to around 65% when considering the number of companies rather than their market weight.
This misvaluation significantly impacts all companies, particularly medium and small caps (which in fact have basically not moved over the past decade).
South Korea offers a compelling alternative to the Chinese stock market. Probably much more compelling than arguably expensive India. Despite China's poor stock performance in recent years, South Korea is trading at about 9.9x 2024 earnings, vs. China’s 11.7x circa (and India’s >23x).
And this lower valuation comes without all the risks related to China, such as policy uncertainty, deglobalization / reshoring / friendshoring, Taiwanese tensions, a real estate bubble, and a stressed financial system.
Imminent policy measures should gradually help close the South Korean discount. Last February, the government announced the so-called Value-up Plan, final details of which should be available shortly.
Click on image below for details.
The plan will allegedly offer tax incentives to companies that implement measures to enhance investor communication and governance, with the aim of focusing investor attention on hundreds of undervalued companies.
It appears that participating companies would be able to tax deduct 5% of any increase in shareholder returns (i.e.: dividends and buy-backs) over and above the average of the previous three years. There would also be a reduction in personal tax on dividend increases, from 45% to 25% (or from 14% to 9% for small shareholders).
For Chaebols and family businesses that typically do not distribute dividends, these measures would represent an opportunity to issue extraordinary dividends over the next two years. Even large companies will be motivated by shareholders to increase their currently low payouts.
Companies that join the program and meet the plan’s minimum communication and governance standards, would apparently be included in specific indices and become thus eligible for investment by pension funds and insurance companies.
At Niche AM, we view South Korea’s companies as exceptionally compelling opportunities, both in terms of valuation and business fundamentals.
This is the reason why our NEF Ethical Global Trends SDG fund is significantly overweight South Korea, which represents 11% of the portfolio vs the meagre 1% held by benchmark MSCI ACWI Value. This overweight position sharply contrasts with NEF EGT's minimal 0.13% exposure to China, exposure which the fund has been actively reducing since 2022, when Niche AM adopted the policy of not investing in countries deemed as autocracies by Freedom House.
NEF Ethical Global Trends holds 33 South Korean stocks, trading at an astonishingly low multiple of around 7x earnings (yes, 7x—it’s not a typo) and well below tangible book value.
These companies aren’t just cheap. They are also companies with good ESG profiles, which are making a positive contribution to achieving the UN’s Sustainable Development Goals (consistent with the classification of the fund as an Article 9 SFDR).
And we know this because at Niche AM we conduct rigorous sustainability analyses, both quantitative and qualitative. Once in the portfolio, we ensure that companies demonstrate a consistent improvement in sustainability over time. If a company deviates from its improvement trajectory, we actively engage with management to understand and address that deviation directly. If the deviation is not justified and/or the company does not return onto an improving trajectory within a reasonable time, the stock is sold as soon as allowed by market conditions.
The 33 South Korean names in our NEF EGT portfolio have been carefully selected based on this comprehensive sustainability process. The selection was made from an initial pool of approximately 150 South Korean firms, which themselves were shortlisted from around 2,500 listed companies on the basis of valuation and liquidity.
The chart below illustrates the mostly improving sustainability performance and responsiveness of South Korean companies in NEF EGT’s portfolio between 2021 and 2023.
As value investors, we don't wait for "catalysts" before investing, primarily because once a catalyst becomes apparent or obvious, it is often too late to invest.
However, if pressed to identify potential catalysts for South Korean stocks, we would mention the MSCI reclassification discussed above and (probably more impactful in terms of upside potential), any reform in North Korea on the lines, for example, of what took place in China or Vietnam over the last 20 years.
Any change in the northern neighbour represents an opportunity to which the market is currently assigning zero probability, and it would hugely benefit this segment of NEF EGT’s portfolio, predominantly composed of companies deeply integrated into the peninsular economy.
See here for further details on NEF Ethical Global Trends SDG.
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This is a marketing communication intended exclusively for institutional investors.
Refer to Fund Prospectuses & KIDs before making any investment decision.
In Japan, shinise (literally “old shops”) are long-established businesses that have been in operation for at least a hundred years – some even more than a thousand years.
These businesses have endured nuclear wars, earthquakes, tsunamis and depressions, and yet, as explained here by Morgan Housel, they keep going on, generation after generation.
Japan is in fact the country with the biggest number of such old businesses, with their products and services clearly enjoying immense prestige (one of these being for example the household brand-name Nintendo).
What is their secret? The reasons for their success are probably many, but there is one that could surprise those used to Western-style capitalism: these Japanese companies hold tons of cash, and no (or very low) debt.
Low leverage certainly helps survival. As illustrated by Housel, with no debt, the number of events a company can withstand might fall within a range that looks like this:
A few catastrophic events might hurt, but you are likely to survive.
With more and more debt, says Housel, the range of events you can survive shrinks until you are toast:
What’s all this got to do with us?
At Niche AM we run a Japanese fund that invests in what we call “orphan companies”, i.e.: companies not covered by the sell-side and thus significantly undervalued. But lack of broker coverage is just one of the features of our fund.
As deep value investors, we can’t but appreciate the business approach of shinise. And consistent with that view, in our portfolio we only hold companies which -like shinise – are net cash positive. In fact, the companies in our Japanese Orphan Companies fund have roughly, on average, 10% more cash than their market cap:
For further details on our Japanese fund see here.
This is a marketing communication intended exclusively for institutional investors.
Refer to Fund Prospectuses & KIDs before making any investment decision.
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Artificial intelligence is getting all the attention from investors and media right now, but if it is to become the most transformative technology of the 2020s it might in part have to depend on batteries to become so.
After all, all successful revolutions need power, and just as the clean energy revolution relies on batteries (for energy storage and transportation), so will artificial intelligence, to some degree.
AI means a lot of different things to different people, but deep down it includes some sort of intelligent machine performing the most disparate functions in the most disparate fields – including medicine, hospitality, household appliances, transportation, military applications, etc etc.
In few words, AI is supposed to give brains to a lot of these machines, but it is batteries that will allow some of these to free themselves, get up or down, and move around. According to this note, this will be the “Decade of the Batteries”.
We couldn’t agree more.
That’s why at Niche AM we have not one, but three different funds which, to a greater or lesser extent, invest in the battery ecosystem.
Both our Electric Mobility and Asian funds invest in EV & battery players which are not recognised as such by the market, and are thus deemed to have significant re-rating potential.
Our Indonesian fund invests instead in a country which is already (and will increasingly become) one of the world’s most important battery hubs. Be it for the availability in Indonesia of key battery minerals nickel and cobalt, the geopolitical “neutrality” of the country in between China and the West, and the Government’s nationalistic strategy to protect and leverage on its natural resources to develop the domestic battery industry, both downstream and mid-stream.
For details see our range of Niche AM funds & NicheJungle funds
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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South Korea ain’t only about chips.
When looking at this Far East market, global investors tend to focus on the Samsungs and similar high-tech exporters. Which is clearly not a bad problem to have as an economy. Yet, South Korea is much more than that, with plenty of other sectors which are equally attractive. Or one could say, equally spicy – like noodles and ramen.
Unlike equity investors, the West’s media & entertainment industry has already noticed the potential and the quality of South Korean assets and products ex-tech, and so have consumers across the world. South Korean companies are already benefitting.
For example, Nongshim, South Korea’s leading instant noodle maker, which has announced this week that it is accelerating overseas expansion as its ramen products benefit from the growing popularity of K-pop, South Korean movies (such as Oscar-winning Parasite) and South Korean culture in general, in countries such as the US, Germany and UK. See here.
As niche investors, we scout the whole globe to try and find attractive assets which are unfairly neglected by the market and which offer huge upside potential, both in terms of cash returns and/or multiple re-rating.
South Korea’s domestic-exposed companies are among the most attractive worldwide from both a valuation and business standpoint, and our NJ South Korean fund is the only vehicle which is available to investors for buying their stock. No other funds invest in these companies, many of which are likely to rally strongly once the effects from the real estate crisis wane.
Our fund includes about 125 stock holdings; trades at around 6x earnings (yes, 6x…this is not a typo) and at circa 40% discount to TBV; and it is highly diversified in terms of sectors, with Tech representing only 4% of the portfolio while the 2 biggest sectors in terms of portfolio weight (Consumer Discretionary and Industrials) weigh just 16% each.
The possible (likely?) inclusion of South Korea in the MSCI Developed Markets index could be a catalyst for a significative revaluation of the whole South Korean market.
Some kind of change in North Korea (even minor – along the lines of past reforms in China or Vietnam) provides instead a powerful free option to which today Mr Market is assigning zero probability. Such an event should disproportionally and massively benefit our portfolio, which is mostly composed of firms exposed to the domestic economy.
Spicy broth with a meaty taste and chewy noodles may not be to everyone’s taste, but South Korea should arguably be in all global investors’ menus.
See here for details on our NJ South Korean fund.
This is a marketing communication intended exclusively for institutional investors. Refer to the Fund Prospectus & KID before making any investment decision.
For any questions email us on: info@nicheam.com
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It is said that aging doesn’t matter, unless you are cheese or, one could add, an investor.
For equity investors, population aging means labour force contraction, higher inflation, lower savings, higher interest rates, higher debt and lower economic growth, which in turn imply lower profit growth, and fewer and less attractive investment opportunities.
Emerging markets, thanks to growing and relatively younger populations and labour forces, should increasingly work as a hedge for aging populations in the West (and China), and stand to benefit as demographics play a bigger role in investment decisions.
This demographic dividend should be gradually reflected in valuations of EM assets, in line with what already happens to some extent within OECD countries (see this paper by Blackrock Investment Institute ).
Among emerging markets, Indonesia should be one of the main beneficiaries of demographics, both in terms of profit growth, and in terms of asset re-valuation.
First, because it has one of the largest, youngest and fastest-growing population in the world. And then because of the sizeable increase in productivity which we expect to come from the enormous investments of the last and also the next 20 years, partly the result of the Government’s Golden Indonesia 2045 Vision agenda and increasing FDI.
At Niche AM we find a theme before it becomes one (and as such crowded and expensive). We believe that Indonesia ticks all the right boxes to become a mega theme for investors over the coming years, of which very favourable demographics is just one. See here for details on our NJ Indonesian fund.
This is a marketing communication intended exclusively for institutional investors. Refer to the Fund Prospectus& KID before making any investment decision.
For any questions email us on: info@nicheam.com
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When searching the web for “the biggest invisible object on Earth” one mostly gets a rather surprising result: Indonesia. Surprising because of the sheer size of the country (the Earth’s 15th largest), the population (the Earth’s 4th largest), and the economy (the Earth’s 16th largest). And yet, despite all that, it is a fact that also Indonesia’s equity market remains equally invisible for global investors.
But this may soon change.
Foreign direct investors are already noticing the country’s potential. Indonesia is already among the top 10 destinations for Chinese FDI, while US multinationals are catching up and have ranked as the 4th largest foreign direct investor in Q1 24, ahead of 5th ranking Japan. FDI in local currency has roughly doubled over the last 2 years.
Last month, Microsoft has announced an investment in Indonesia’s digital infrastructure, while only last week it was Elon Musk’s turn as he launched in Bali SpaceX’s satellite internet service for the country’s health sector.
Indonesia is admittedly still a niche, off-radar, equity market, but we are confident that stock investors will soon follow business investors and start buying the country’s deeply undervalued public equities. Mainly small caps, which are currently trading at less than 7x earnings (vs the almost 23x of their Indian peers!) and are likely to benefit from the Government’s ongoing and massive infrastructure investment programme. The current disconnect between stock and business investors is unlikely to last.
As deep value investors we are generally happy to buy an asset as soon as we see an attractive yield, without the need to wait for a catalyst – which often remains invisible until it’s too late. And in fact, we see that attractive return for Indonesian stocks already today. Having said that, we do anticipate at least 3 possible catalysts:
Satya Nadella and Elon Musk’s investments are just two high-profile examples of what could follow in terms of FDI news-flow, something which could help put Indonesia on stock investors’ radars, especially as the country benefits from industrial re-shoring out of China and from the world’s appetite for Indonesian natural resources.
Declining US inflation and interest rates (if they were to remain on a downward path) should also benefit Indonesia, along with its EM peers.:
An increasingly expensive equity market in India and the fear of a possible correction or crash could gradually or suddenly convince investors to switch into cheaper Indonesia.:
Indonesia doesn’t deserve to remain invisible, and we are confident it won’t stay so for much longer. See here for details about our unique Indonesian niche fund.
This is a marketing communication intended exclusively for institutional investors. Refer to the Fund Prospectus & KID before making any investment decision.
For any questions email us on: info@nicheam.com
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Niche AM’s mission is to discover an investment theme before it becomes one (and therefore before it becomes expensive and overcrowded).
Niche AM believes Indonesia could become one of these “super themes” in the years to come, perhaps the emerging market darling of the next 5 years, replicating the performances of China in the 2000s and India in recent years.
The country certainly has all the potential to become such a theme, and it also has a number of possible catalysts on the horizon.
Infrastructure investment is one of these key catalysts. Not only from Government, but also from foreign investors, as Indonesia capitalises on growing political and economic stability, and as it benefits from its key geopolitical position: standing right in the middle of the geopolitical fault line between China and the West could help Indonesia attract FDI at increasing rates from both sides.
This is not wishful thinking.
Only last week Microsoft has announced an investment in Indonesia’s digital (cloud and AI) infrastructure, which -albeit not sizeable relative to the country’s GDP- is yet another sign of Indonesia’s benign FDI outlook (see here).
Microsoft’s digital infrastructure investment follows last November’s signature between Indonesia and the US Government of a new partnership to explore supply chain opportunities in the strategic semiconductor sector (see this), and builds on the company’s “Empower Indonesia” initiative, which includes plans to roll out Microsoft’s first data-center region in the country (see here).
With the highest number of micro and small enterprises per capita in the world (and a geographic and logistical dispersion which is probably also unique in the world) digitalisation should massively boost productivity across the archipelago.
According to research by Kearney, AI alone could contribute nearly US$1 trillion to Southeast Asia’s GDP by 2030, of which Indonesia is poised to capture more than US$365 billion.
See here for details on our investment case on Indonesia and our NJ Indonesian fund.
This is a marketing communication intended exclusively for institutional investors. Refer to the Fund Prospectus & KIDs before making any investment decision.
For any questions email us on: info@nicheam.com
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European investors’ net allocations to ESG ETFs have almost halved to ~€7bn in Q1 24 vs Q4 23, with sales down to just 16% of total ETF inflows during the quarter, compared with 29% in Q4 23 and 65% at the height of investor ESG euphoria in 2022 (see here).
According to Morningstar, ESG investing appears to be going through “a period of existential crisis” as investors have allegedly become concerned about the underperformance of ESG investments.
Yet, performance, as beauty, is often in the eye of the beholder. All of our funds are ESG compliant – actually, they are more than that, they are also Article 8, 8+ or even 9 SFDR. But not because we claim that ESG outperforms. Whether or not it does, it mostly depends on the data used to assess performance. As Chicago’s Coase once famously claimed, “if you torture the data long enough, they will confess to anything”.
For us, all what ESG & SDG investing does is providing portfolios with a superior risk/benefit profile (which is no small feat). In our view, ESG helps reducing regulatory, political and legal risks (in the sense of helping avoid courts and potentially huge legal bills), while SDG ensures investments in high-growth sectors (helping avoid old economy’s value traps).
Our ESG approach is also so to speak “macro”, meaning that we don’t invest in autocracies (which helps avoid all sorts of risks), nor we invest in those countries which are in FATF’s grey list for money-laundering. With no ifs and buts, we also exclude from all our funds sectors such as tobacco and weapons – no matter how these sectors are “improving” from being deadly to being less deadly.
This brings us to a final, but not less important feature of our ESG approach: we don’t just “screen off” potential portfolio holdings based on external ESG-score providers.
For 3 main reasons: for starters, these ESG-scores vary dramatically from one to another provider; they are often not available for the micro, small and mid-cap companies in which our funds frequently invest; and finally, they are often quite puzzling. For example, S&P Global’s latest ESG score for Philip Morris, whose cigarettes continue to cause ill health and death around the world, is 85 out of 100, while the score for Tesla, with its transformational contribution to the shift away from fossil fuels, is just 40! (as well explained here).
So how do we do it? We use an integrated approach, combining our own, proprietary sustainability analysis (both quantitative and qualitative) with intensive corporate engagement, mainly aimed at accompanying small and micro-caps (which have more limited resources) on their paths towards sustainability.
Further details of our approach here and here.
This is a marketing communication intended exclusively for institutional investors. Refer to Fund Prospectuses & KIDs before making any investment decision.
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Italy’s Insurance Regulator IVASS has recently conducted a study into the country’s unit-linked policies and other insurance-based investment products which was aimed at intercepting possible cases of greenwashing in the industry.
The study has assessed sustainability claims of over 100 domestic policies, related to over 1 million contracts and approximately €50bn of insurance premia. You can read the full report here.
While the IVASS analysis did not reveal any obvious cases of greenwashing, it also highlighted the substantial absence in the domestic insurance market of so-called “dark green” products, i.e.policies that include sustainable investments as an objective of the investment policy (Article 9 products as per the EU’s SFDR).
About 92% of products are instead classified as “light green”, that is Art. 8 products that promote, among others, environmental or social characteristics in investment policies, while the remaining 8% are not even “light green” but just Article 6 products which only include sustainability risks in investment choices.
Interestingly, the study has perceived a degree of caution by asset managers when classifying the products as as as “light green“, “dark green” or Article 6, reflecting the possibility of “bleach-washing” (that is, when asset managers prefer not to define a financial product as more or less sustainable in order to reduce disclosure obligations and avoid legal risks).
Niche Asset Management manages two Article 9 SFDR funds, which as well as being 100% sustainable are also thematic, global and managed with a deep value investment approach: the Electric Mobility Value Niche, a high-growth theme fund, trading at deep-value multiples and managed by the team that in 2015 launched the world’s 1st electric mobility fund ever; and NEF Global Ethical Trends, a global ex China fund with about 275 stocks spread across 27 thematic portfolios functional to the achievement of the United Nations’ Sustainable Development Goals.
Our deep value approach, which guarantees extremely low turnover, enables continuous engagement between Niche AM and the management of companies in the portfolio, thus allowing careful monitoring of corporate sustainability policies.
We do not do purely formal screening-offs or tick-the-box analyses. No green-washing, and certainly no bleach-washing.
For details on both funds see here.
This is a marketing communication for institutional investors. Please refer to Fund Prospectuses & KIDs before making any investment decision.
For any questions email us on: info@nicheam.com
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Are stocks in a bubble which may be about to pop?
Who knows.
There certainly seems to be a degree of irrational exuberance in some pockets of the equity market, but as Keynes has famously observed markets can stay irrational for longer than one can stay solvent. Most importantly, the variables we need to know to solve the bubble equation (inflation, interest rates, liquidity, productivity, geopolitics, etc) are too many and mostly imponderable.
However, while we can’t predict we can certainly be prepared.
And the way to be prepared is and has always been to hold a properly diversified portfolio – in terms of investment style, industry, market cap size, number of holdings and geographical and currency exposure.
Investors are currently overexposed to seemingly expensive and overcrowded momentum strategies, paying arguably excessive premia for a very small fraction of mainly big-cap stocks within über-concentrated portfolios.
Niche AM funds provide investors with a much-needed, prudent counterbalance, through highly liquid and diversified portfolios of value stocks, many of which are found among neglected sectors and overlooked geographies.
Value stocks have rarely been as cheap and as attractive in terms of financial strength, earnings prospects and sector breadth as today. The style should benefit going forward from the boost to global economic growth which could come from two likely and massive secular trends, i.e. energy transition and deglobalisation.
True, valuation has seldom been a strong predictor of short-term stock performance (as the near term is often dominated by the “noise” of news-flow, fads and emotions), but it seems to be a strong predictor for the longer-term, explaining on some estimates about 80% of 10-year stock returns.
While history doesn’t repeat itself, it does often rhyme and perhaps it is worth remembering that in the 10 years after the burst of the 2000 tech-bubble, value strategies have significantly outperformed.
To sum up, and paraphrasing Buffett, you can’t predict a bubble or a bubble bursting, but you can make sure you are not caught swimming naked when the tide goes out.
This is a marketing communication for institutional investors. Please refer to Fund Prospectuses & KIDs before making any investment decision.
For any questions email us on: info@nicheam.com
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