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Experts point to Asian equities for value

Nicki Bourlioufas  |  21 Jun 2017Text size  Decrease  Increase  |  

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With many analysts saying US and Australian markets are overvalued, investors are looking elsewhere for better value.

Experts point to emerging equity markets in Asia, including Taiwan and South Korea, for growth opportunities.

Korea’s benchmark Kospi index has rallied hard this year, having hit all-time highs. Accounting for around 20 per cent of the KOSPI index, the rally in Samsung and other export-orientated technology and electronic shares have attracted strong flows into the Korean stock market, pushing the Kospi higher.

Taiwanese equity markets too have rallied, buoyed by technology companies, which make up well over 50 per cent of the Taiwanese benchmark index, the TWSE.
Over one year to June 14, the Kospi is up around 23 per cent, while the TWSE is up 24 per cent. Over the year to date, the Kospi is up a whopping 17 per cent while the TWSE is up around 9 per cent. The Nikkei is up 31 per cent over 12 months and around 4% over the year-to-date.
Experts still point to an under-valuation in Korean shares in particular.

South Korean shares undervalued

According to recent reports, Korean equities remain some of the most undervalued in the world, despite the rally. According to data from Samsung Securities, South Korean shares have been trading at price-earnings ratios of just below 10:1, lower than the averages of the MSCI’s emerging and advanced market indexes.

“We would say that South Korean equities are amongst the most undervalued in global markets at this time,” says Nimalan Govender, portfolio manager with Morningstar Investment Management Australia.
“However, while our valuations for South Korea and Taiwan remain attractive, they are not as high as they were previously, largely on the back of strong tech shares performance.

“At the current point in time, emerging market energy and telecommunication services are the most attractive to us.”

Govender says ownership dynamics in South Korea had curbed some market gains, though a new president there may improve corporate governance. “These include the impact of Korean Chaebols [family controlled companies] on the market.  Chaebols are known for their poor corporate governance,” said Govender. Examples include the Samsung and Hyundai conglomerates, both chaebols.

However, the election of Moon Jae-in in May as the new president of Korea has helped to spur on the stock market given the possibility that he could help to resolve the country’s entrenched corporate governance problems and the lack of transparency with chaebols. South Korea’s economy too is struggling with low growth and high unemployment, which investors hope the new president will counter.

Taiwan tech-dominated

In Taiwan, the tech-dominated market has also jumped. Taiwan is the third largest-constituent of MSCI’s benchmark emerging markets index. The benchmark index has rallied there too.

“The rally in Taiwan also relates to tech shares re-rating. IT stocks that fared well are in some way tied to the Apple supply chain. Like South Korea, we continue to find valuations for Taiwanese equities attractive.

“We are also aware of many attractive consumer driven and industrial shares in these markets that are currently trading at attractive valuations," says Govender.

According to Bloomberg, net inflows into Taiwan equities have swelled to more than US$15 billion over the 12 months to May, the most among 10 Asian markets tracked by Bloomberg outside of China. Apple suppliers, such as Taiwan Semiconductor Manufacturing Co, are among investors’ favourite targets given demand for iPhones.

Japan follows trend

Japanese markets have also rallied, but for different reasons. 

“In Japan, earnings potential is a key consideration especially in Japan, where high growth may not be expected due to the shrinking population,” says Bianca Rose, a senior portfolio manager for Morningstar.

She is drawn to Japanese equities due to the potential for companies’ return on equity (ROE) to improve due to better corporate governance practices, where the country has moved further ahead than South Korea.

“Japanese companies’ ROEs rank lowly versus their US counterparts and have the potential to be improved via a number of avenues (such as divesting unprofitable businesses, consolidating the number of companies in an industry segment and/or modestly increasing leverage), if, and this is an important if, corporate management teams are willing to do so.

“In general, domestically-oriented sectors are seen to be more attractive than their export-oriented counterparts as their ROEs have more potential to be improved through better capital management practices irrespective of future foreign exchange moves. 

“Korea can be compared to Japan alongside the same theme of corporate governance and whether it is improving or not. The main difference is that the Abe government in Japan is pro-actively working to encourage better corporate governance practices,” Rose says.

Some local managed funds with South Korea exposure, and rated bronze or better by Morningstar, include Antipodes Global Fund Long Only, with a 13 per cent exposure, and the Platinum International at around 8 per cent of the portfolio, according to Tim Murphy, Morningstar's director of manager research.
In terms of Japanese shares, he points to Arrowstreet Global Equity with a 16 per cent allocation, 14 per cent for Platinum International and around 11 per cent for Acadian Global Managed Volatility. In terms of Taiwan, none of them has more than a 5 per cent allocation.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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