Value investor Shinyoung Asset Management has become the first firm in South Korea to bet on unification with North Korea by launching an equity fund focused on companies potentially in line to benefit.
The move has been spurred by president Park Geun-Hye’s aggressive stance towards boosting economic synergy between the two Koreas, which officially split at the end of the Korean War in 1953, although Shinyoung’s rationale for launching its Marathon United Korea Fund is underpinned by a range of social, political and economic factors.
Incepted in March, the portfolio is managed in a deep-value style focusing on textiles, manufacturing and key domestic industries. The need to bring the North in from the cold politically and economically is less of a driver than the South’s need to boost its own domestic economy, Shinyoung argues.
Earlier this year geopoliticist Parag Khanna voiced his views at an AsianInvestor conference that unification of the two Koreas was likely within a decade, pointing to a recent visit to Seoul by Russian president Vladimir Putin in which he declared there would be an iron silk road.
“You can only build a railway from Russia to South Korea by going through North Korea,” Khanna noted, saying the argument for integration was supported by the growing number of special economic zones in the North, along with increased international dialogue on accessing its rare earth minerals.
The economic value of North Korea’s mineral resources of graphite, iron, magnesite, silver and iron ore are estimated at W7,000 trillion ($6.9 trillion), notes Shinyoung in marketing material for its fund.
It argues that unification would be a chance for South Korea to secure new growth drivers for its economy, which has seen GDP growth of 8% in the early 2000s sink to 2% in 2012 and 2.8% in 2013.
South Korea has been dogged by a drop in manufacturing exports and low birth rates, with domestic consumption contributing just 50.9% to its economy in 2012 – the lowest level among OECD nations.
But Shinyoung points to annual GDP growth potential of 7% to 8% for North Korea. It sees an opportunity to synergise the South’s technical assets with the North’s labour force to boost price competitiveness
In 2009, Goldman Sachs forecast that a united Korea would rank eighth as a nation worldwide in terms of GDP, surpassing France, Japan and Germany by 2050.
As part of the rationale for investing in its fund, Shinyoung cites unification between the former East and West Germany in 1989 as an example.
In the decade following the collapse of the Berlin Wall German stocks grew 5.6 times, against 1.5x for the Kospi index, notes Shinyoung. The leading companies in Germany’s pharmaceutical, fabric/textiles and logistical industries saw their strongest growth in that decade, it points out.
While Khanna admitted that politically North Korea remained “as indecipherable as ever”, he suggested that economically there was a clear need for sustained hard currency inflows and a desire to reform.
Pointing to the North’s emphasis on special economic zones, planned new infrastructure and increased trade as evidence of gradual economic opening, Khanna suggested it was all adding up to something.
“My belief is it adds up to functional integration between North and South,” he noted. “Ideally it will happen without the North collapsing. You have to reassure the North constantly that it remains a sovereign, independent country while you functionally subsume it into a sort of cross-border China-Russia-South Korea condominium. But I really do believe it will happen within a decade.”
The Shinyoung Marathon United Korea Fund has returned 8.39% since inception and has attracted $45 million in assets to date.
Shinyoung Asset Management picked up AsianInvestor’s 2014 award as best Korea equities manager, small fund house, as reported. The firm saw its AUM grow 65% last year to $7.5 billion, evenly split between institutional and retail. Some 70% of its assets are equity focused, with 24.9% balanced, 0.6% bonds and 3.7% others.