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Winter Olympics: time to play in Korean markets

Winter Olympics: time to play in Korean markets

South Korea is now hosting the 23rd Winter Olympics. As the world’s gaze turns to the country, it will be a good chance for the host nation to show off its economic ascent, says M&G Investments.

The progress of the South Korean economy can be illustrated through comparison with its wealthy neighbour, Japan – with whom it co-hosted the 2002 World Cup.

‘The IMF [International Monetary Fund] estimates that Korean income per head today is roughly one-quarter lower than Japan’s.

'When Seoul hosted the Summer Olympics in 1988, it was five times less,’ said Matthew Vaight, portfolio manager of global emerging markets strategy.

In the case of markets, South Korea was one of the best performing equity markets in 2017 and the benchmark KOPSI Index surged by 24.1% last year. Despite strong gains in the markets, the valuation remain roughly the same.

Vaight said performance was mainly driven by earnings growth and there was little multiple expansion.

‘Korea remains attractively valued and has always been one of the cheapest markets, but this historic ‘Korean discount’ should narrow at some point.’

According to the executive, investors have been sceptical about putting their capital into Korea on account of the country’s poor corporate governance practices, but there are encouraging corporate governance trends which could drive a re-rating.

The Korean government has been undergoing reforms aimed at stopping poor treatment of minority shareholders, such as the revision of the Commercial Acts to increase minority shareholder protection.

‘Among other things these have incentivised companies to pay out dividends and empowered minority investors to vote in response to management actions,’ he said.

‘These efforts seem to be working. There has been marked upwards trend in distributions of dividends which suggests that shareholders are receiving a great share of a company’s cash flows and profits.’

Samsung Electronics, Vaight added, has been at the front of these new shareholder friendly measures.

‘Over the past few years, Samsung has increased its dividend pay-out significantly and plans to pay out 50% of its free cash flow to shareholders.’

‘Even after this progress Korea’s pay-out ratio remains well below that of other markets and we believe there is plenty of room for them to grow.’

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