Korean asset owners have assessed the consequences of the current turmoil in global markets — and in turn, will be limiting or even halting their investment activities for the remainder of 2022 and into 2023.
This was the overall message that was sent when AsianInvestor met last week with investment professionals from Korean asset owners, and the people around them in the asset management industry, in Seoul. Similar to fishing captains looking at rough seas during an uncertain weather forecast, they are holding back their capital from a somewhat perfect storm.
The general strategy is to stay docked and strategically prepare for next year’s deployment of capital. Only giants like the National Pension Service (NPS), the world’s third-largest pension fund; sovereign wealth fund Korea Investment Corporation (KIC) and a few other major and minor asset owners are staying steady at the rudder and pressing ahead with investment activities. Indeed, Asianinvestor couldn't help but notice the bustling activity at the lobby of State Tower Namsan, KIC's headquarters.
Still, asset managers would be wise to prioritise Korean asset owners in the coming months — if only to make themselves useful for asset owners at a time when uncertainties are abundant.
Besides the current market turmoil, with fixed income and equity markets down at the same time, Korean asset owners are also currently facing capital constraints.
Insurers are preparing for a new regulatory regime to come into play from January 2023, altering the capital requirements for especially risky assets such as equities — making liquidity even more essential. The Financial Supervisory Service (FSS), Korea's financial regulator, is still relatively ambiguous about private market assets in particular, including alternatives, AsianInvestor heard time and time again.
Advice on how to navigate investments under a new regulatory regime similar to the EU’s Solvency II will be well received among insurers in Seoul.
In Korea, individuals can take out a loan at their pension fund or mutual aid association. These loans have relatively attractive interest rates compared to bank loans or credit card debt in the current rising interest rate environment.
This trend of lending money to members has had a significant impact this year on the liquidity and amount of dry powder for pension funds and mutual aid associations, sources tell AsianInvestor. Simply put, some of them do not have much more capital to deploy for the rest of 2022. With hopes of this situation easing in the first half of 2023, there is now an opportunity to advise pension funds and mutual aids on how to find value in next year’s market and to pick the right investments, especially within alternatives.
On October 26, 2021, one US dollar cost 1,167.05 Korean won. On October 26, 2022, that same US dollar cost 1,433.94 Korean won, an increase of 22.9%. With the US being the world’s largest investment market, the exchange rate brings further considerations for Korean investors. The Bank of Korea has followed with its own rate increases to battle inflation and to help the won, as opposed to the Bank of Japan, and the even worse situation for the Japanese yen.
While some major Korean asset owners invest directly overseas into commingled funds from asset managers, others work with domestic asset managers that then pool capital together from several asset owners into a combined mandate. Either way, currency hedging considerations have to be considered, especially as the costs to do so are increasing.
For instance, the Fed’s increased rate’s effect on bonds is somewhat lost, due to hedging costs for Korean investors. However, with many Korean asset owners heavily exposed to domestic assets, overseas diversification is a must. Furthermore, AsianInvestor heard many investment professionals share bleak views on the Korean economy both short- and long-term, going so far to say that “the Korean model has peaked”.
With more capital coming out of Korea in the future, overseas asset managers would be wise to visit Seoul and discuss how that could be done. And although investment appetite is low right now, there is faith in the city that the perfect storm and its many obstacles will hopefully all clear after the first quarter of 2023.