I wrote a lot about South Korea last year, so I think it's something I should revisit now that we have begun the new year. In general what I argued most of the year was that investors should not allow themselves to be spooked by headlines, but instead to see panic-induced selling as an opportunity.
At the beginning of 2017 I told investors that,
"South Korea is attractive in numerous ways. First, it is a highly resilient country. This means that it is more capable than most countries to absorb financial and economic shocks as well as periods of general investor fear (which the press has dubbed 'risk off') periods. Though generally resilient, South Korea stands out as particularly strong in fiscal fitness, especially due to very low deficits and a high domestic savings rate. Low deficits mean, of course, that the government is not borrowing much (compared to other countries) and has high savings rates meaning that however much the government is borrowing, the domestic population has the financial resources to help a great deal with that financing. This leaves South Korea at much less risk for a debt crisis than if it were dependent on foreign lenders, who are more apt to stop lending during times of fear. This phenomenon is known as 'sudden stop' and can be very disruptive to a nation's financial system. South Korea is a relatively low risk for sudden stop. In addition, S. Korea has the kind of trade dynamics which make it more resilient than most other countries. For example, it has a solid score when it comes to reserves of foreign currencies. As a result, if the Korean Won is attacked by short-sellers, the value of its’ currency can be preserved by buying it back in open markets with currencies that are widely accepted (USD). In addition, South Korea has a strong trade balance. It sells its’ goods to many nations in exchange for foreign currencies which have earned a solid score of foreign reserves. These types of factors were instrumental during the 'Asian Contagion' on the late 90s. Finally, South Korea is attractively valued, which means in addition to being resilient, it is at relatively bargain pricing. For example, its’ earnings and sales yields are both quite high, which means that its’ price is low relative to the level of sales and profit for its companies. In addition, the cash flow yield is solid, and EBITDA compared to enterprise value is very attractive. It's important to look at more than one valuation metric because sometimes companies can engage in earnings report manipulation. However, exaggerating some revenue and earnings numbers is more difficult than it is others. Furthermore, distorting it is most difficult to distort all of them at the same time. Solely looking at Korea's version of GAAP earnings, one does not get a complete picture. However, looking at sales, cash flow and EBITDA (which omits some of the cost categories most susceptible to management manipulation) one gets both a broader view and more information from the standpoint of forensic accounting.
South Korea is not perfect. It has stalled somewhat in moving towards greater business freedom. The economy is quite free, but long-term returns tend to be a matter of shifts in freedom and not merely levels of freedom. In addition, geo-political risks are impossible to quantify, particularly in regards to its neighbor to the north."
So although I did warn that international security risk could arise from North Korea (and it did), South Korea's story was sufficiently compelling and its resiliency sufficiently strong that it was a good investment proposition. That's why the index that I work on had it as a top holding.
"Rocket Man" Kim Jong-un did rattle his saber and even ended up in a Twitter war (let's hope and pray that it remains only on the Twitter field of battle), complete with ferocious language on both sides. Despite that South Korea was a stellar performer, 47% in dollar terms and 4th best in the world. This was not just a value story, it was a growth story too:
Ruling party pro economic reform, opposition very ineffective
Pro-market and nationalist parties took power
Generally pro-growth culture, by a left of center leader who was expected to be more anti-growth.
|South Korea||Very high||Very attractive||High||Export growth, delay in rate hikes||G&V|
South Korea grew its earnings at a robust rate last year, handily beating the global average. After the trauma of a Presidential impeachment at the end of 2016 (Park Geun-hye) and then a newly-nuclear hostile neighbor to the north, such growth and performance and resiliency is remarkable.
Some of rocket man's rockets crashed, but the South Korean economy continued to rocket upwards, and it lifted investors along with it.