Citywire Selector - For Professional Investors

Register to get unlimited access to Citywire’s fund manager database. Registration is free and only takes a minute.

The most overlooked value opportunity in EMs

The most overlooked value opportunity in EMs

Despite recent political scandals, the strength of South Korea is overlooked by emerging market investors, according to Eastspring Investments’ Andrew Cormie.

Speaking at an event in London, Cormie who runs several funds at the firm including the Eastspring Investments - Global Emerging Market Dynamic fund, highlighted the fund has 19% exposure to Korea as a valuation play.

'There are some very good companies in Korea that sell at valuations which are much lower than similar companies outside of Korea, as investors are worried about all sorts of things in the country at present,' he said.

Cormie, who runs the fund alongside Steven Gray and Sang Hoon Lee, said the fund is overweight Korea relative to the MSCI Emerging Markets Index, which has 14.4% in the region.

'There are a lot of corporate governance concerns around Korea, there is obviously some political risk there,' he added, referencing the recent impeachment of President Park Geun-hye on corruption charges.

Stock selection

Despite not appearing in the top ten positions of the fund, Cormie highlighted Korea-based electric power company Kepco, as a position he sees as having a big margin of safety which makes it an opportunity rather than a risk.

'They produce about 90% of the countries distribution and is government owned. The government in South Korea is a populist government, so they want to be re-elected and they will try very hard to be re-elected.

'One of the things people in Korea worry about is inflation, so the government are very hesitant to give very big electricity tariff increases. But the reality is that there hasn’t been enough reinvestment in the generation and distribution business in Korea.'

Cormie said Korea is always in the midst of a ‘peak weather season’ and said it’s because of this environment citizens are unable to keep up with their electricity usage.

'The people don’t want to see inflation but they also don’t want their kids to freeze, so there is always a constant battle with the government over allowing Kepco to put up their tariffs so they have got some money to reinvest into the business.

'Ultimately they will have to let them make a big enough profit to reinvest. You’re buying the stock at 0.25 price to book. So, we think that is a big enough margin of safety which allows us to be patient waiting for that tariff to come through.'

Cormie said in most emerging market countries you would find companies like Kepco, trading at 0.8 or 0.9 to book, but in Korea, you can get them even cheaper.

'We don’t know what’s going to happen in the country, we are buying stocks with a big enough margin of safety. We like buying things that are out of favour and look cheap, the reason they look cheap is because they are out of favour and everyone else has walked away from them.

‘The only thing we know for certain about Korea is that they are looking for attention. They want to make sure people keep worrying about them, saving them a seat on the list of things to worry about table.'

The Eastspring Investments GEM Dynamic fund, returned 3.74% in US dollar terms over the three years to the end of February 2017. This compares with a 5.26% rise by its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD, over the same time period.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Events
  • Citywire Alternative Ucits Retreat 2017

    Citywire Alternative Ucits Retreat 2017

  • Citywire Milan 2017

    Citywire Milan 2017

  • Citywire Paris 2017

    Citywire Paris 2017

  • Citywire Deutschland 2017

    Citywire Deutschland 2017

  • Citywire DACH 2016

    Citywire DACH 2016

  • Citywire Italy 2016

    Citywire Italy 2016

  • Citywire Milan 2016

    Citywire Milan 2016

  • Citywire Alt Ucits 2016

    Citywire Alt Ucits 2016

  • Citywire Berlin 2016

    Citywire Berlin 2016

  • Citywire Switzerland 2016

    Citywire Switzerland 2016

  • Citywire Amsterdam 2016

    Citywire Amsterdam 2016

  • Citywire Montreux 2016

    Citywire Montreux 2016

  • Citywire Deutschland 2016

    Citywire Deutschland 2016

  • Citywire Latin America 2016

    Citywire Latin America 2016

  • Citywire Milan 2016

    Citywire Milan 2016

  • Citywire Munich 2016

    Citywire Munich 2016

  • Citywire Paris Alt Ucits 2016

    Citywire Paris Alt Ucits 2016

  • Citywire Zurich Alt Ucits 2016

    Citywire Zurich Alt Ucits 2016