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He spoke with AsianInvestor about the change in the nationÆs politics, with the presidential inauguration last week of conservative, chaebol-friendly Lee Myung-Bak. Lee is a 66-year-old known as ôThe Bulldozerö from his days as both CEO of Hyundai Construction as well as his term as SeoulÆs mayor. He has pledged to reverse what he considers his predecessorÆs soft stance towards North Korea, to repair diplomatic ties with the United States, and to focus on boosting economic growth, claiming that KoreaÆs economy has underperformed.
He succeeds Roh Moo-hyun, a younger leader who attacked chaebol corruption but failed to uproot these powerful conglomerates. Notably, some of LeeÆs candidates for his cabinet have been accused of corruption.
AsianInvestor: Is the election of Lee Myung-Bak really good for business?
Um Tae-jong: HeÆs definitely business-friendly, given his background as the CEO of Hyundai Construction. The construction industry is different from manufacturing or IT. The CEOs of construction companies know how to act. They donÆt talk, but they act. TheyÆre good at implementing things.
And thatÆs a good thing?
That kind of characteristic, of being a CEO, could jeopardize his governmentÆs fiscal policies. HeÆs promised the Korean public to provide them with æ747Æ. That means he has pledged to achieve 7% GDP growth, to raise per-capita income to $40,000 and to make Korea the seventh-largest economy in the world. KoreaÆs growth rate in 2007 was just above 4%. ThereÆs no way it can reach 7%. LeeÆs now saying maybe weÆll get to 6%.
But surely itÆs good to want the economy to succeed.
LeeÆs biggest political agenda was æ747Æ, which boils down to making Korea richer by stimulating the economy and business, and by deregulation. ThatÆs fine but LeeÆs trapped by his own political promises. This could be counter-productive if the market doesnÆt help him. People must take the æ747Æ promise as a symbolic number, not as a real number. Of course many people realise itÆs not attainable but others believe in the new presidentÆs capability. They could end up very disappointed.
What will happen regarding deregulation?
The new government has hired David Eldon, the former head of the Dubai International Financial Centre and former chairman of HSBC, as an advisor on deregulating the Korean financial system. Lee wants to deregulate and to lower corporate taxes. These policies have led critics to think heÆs supporting the chaebols but not ordinary citizens.
How has the financial market reacted?
It supports these measures but it hasnÆt responded to Lee. The market has moved independently of his promises. But investors know LeeÆs agenda will favour sectors like property, construction and construction-related areas like basic materials.
Are valuations in these areas attractive?
People see growth potential because the government will spend a lot of money to implement its promises. ThatÆs a long-term impact, not a short-term one. So we should be over-weight these areas but in the short run, this doesnÆt factor in our stock picks. You still have to look at each company and its price.
What sectors might suffer?
[Laughs.] Good question. Maybe consumer staples?
What other themes are driving the Korean equity market?
The stockmarket will be volatile and trade within the 1,600-1,800 range. Many people who invested last year will realize profits when the index nears 1,800, and theyÆll redeem. There will be plenty of buyers when the index falls toward 1,600. This trading is based on local psychology.
What about foreign investors?
They have been selling Korea for the past two months because of their own liquidity issues. Net outflows since the start of the year have reached $10 billion. Foreigners made big returns in 2007 from this market and if they need to redeem from Asian markets, KoreaÆs the first place to realize profits. Foreign investors generally donÆt see positive fundamentals here so theyÆve been shorting the market.
So is the Korean stockmarket in trouble this year?
No, I donÆt think so. Some investors have returned in the past week or so. Once they have some visibility on the US economy, and are confident that Asia has separated from any US recession, they will look here. TheyÆll see that Korea has become cheap in terms of price-earnings ratios and price-to-book ratios, and looks attractive compared to India and China. Already weÆre seeing inflows in the cash and futures markets. And domestic institutional investors are still buying local equities.
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