What South Korea's Olympic Games Mean For Investors

This may be the best, boring Olympics ever. And for South Korea, that's good news. There will be no post-Olympics fallout like there was in Rio de Janeiro. The economy doesn't need anymore drag than it already has

Photo: © Depositphotos.com/zhukovsky

On the Olympics front, TV ratings are down once again.  The same held for Rio's Summer Olympics and Sochi's Winter Olympics four years prior. The games end on February 25 and then South Korea is out of the spotlight. A trend is emerging and it shows less interest in the Olympics. South Korea can handle that.

"I think the Olympics come and the Olympics go and this one will be one of the more forgettable ones, only in a good way," says Clem Miller, a fund manager with Wilmington Trust, $83.5 billion asset manager based in Deleware. "I'm saying the Olympics end up being neutral for South Korea," he says. "I don't think it brings a lot of big bang to the economy."

So far this year, the iShares MSCI South Korea (EWY) fund is up just 1% as of market close on Friday, February 16. It's underperforming the MSCI Emerging Markets Index by about 400 basis points.

Not only are the Olympics a ratings bummer, they have done nothing to give South Korea any sort of equity lift-off.

But despite that lackluster performance this year (it's beat in 12 months, three years, five years and 10 years), South Korea is still the third largest emerging market ETF in terms of inflows based on BlackRock's iShares family. Their two China ETFs are No. 1 in terms of flow.  South Korea is No. 2, with about $120 million in the last six weeks.

"The spotlight sparks interest for the retail investor," says Tushar Yadava, an iShares investment strategist in New York. "There are times when you're not looking at a particular country or region, then you see the pageantry of the winter Olympics and it probably helps allay investor concerns."

The Olympics have become synonymous with wiping out a city's budget. Not to mention, rampant corruption. South Korea largely did it on the cheap with temporary structures they can take down once the games are over. The big corporations like Samsung have played a role, but it's been relatively low key.

Some say that recent corruption probes, which saw the jailing of a Samsung senior executive named Jay Lee (released just before the Olympics) and former President Park Geun-hye kicked out of office last year, have cooled the big conglomerates' gleeful participation.

Samsung is still there, though. Two Dutch short track speedskaters have been using Samsung Smartsuits. The skating suits use five embedded sensors to measure body posture and the distance between the skaters' hips and the ice. The skaters' stats are then transmitted in real time to their coach, who can then send them vibrating signals to modify their positioning.

KT Corporation, a South Korean communications company with ADRs on the NYSE, has its 5G technology being used to beam high-bandwidth data around the Olympic parks enabling everything

from driverless shuttle buses, 360-degree video streaming, and virtual and augmented reality experiences, UBS noted in their Intellectual Capital blog on Feb. 13.  It is one of the more prominent Olympic plays, but the stock price is down on the month.

The political turmoil, criminal indictments and competition from China are all headwinds for South Korea. Even Samsung Electronics is down roughly 4%, and they account for 26% of the KOSPI 200 Index. The rest is LG, Hyundai and Lotte, whose chairman -- Shin Dong-bin -- was jailed last week on bribery charges.

This make South Korea look more like an emerging market than the developed one it really is.  The FTSE Russell Index reclassified South Korea as a developed market in 2009. The MSCI still has it as an emerging one due to a technicality regarding currency convertibility.

Corruption, a hallmark of emerging market nations like China, Russia, India and Brazil, is also a problem. That, and the dynastic, family-run conglomerates, all give South Korea more in common with the emerging world than the developed one.

As a result, South Korea trades at lower multiples, meaning it's cheaper to own a South Korean ETF than one of the big China funds.

"South Korea has a lot of problems right now," says Miller. "From the perspective of a fund manager, I think you have bigger issues at work that overshadow the Olympics. One is the shipping industry is a disaster," he says.

Hanjin Shipping is now being sold off in the equivalent of a Chapter 11 bankruptcy reorganization. Daewoo Shipbuilding & Marine is restructuring. Their stock price is down 93% over the last five years.  Hanjin is down almost 100%.

"These are very big companies for Korea and it is a major issue," Miller says. "Chinese competition has hurt them."

China has very cleverly tried to beat the Koreans at their own game. They boycotted some South Korean imports a couple of years ago, and while that has eased a bit, it did hurt shipping. The cyclical nature of the shipping industry, plus the China ban, hurt exports of major publicly traded companies like Hyundai.

Hyundai Motor Company shares are down 27% in the last five years. Hyundai Heavy Industries shares are down 39% over the same period.

It looks worse than it is.

South Korea is fertile ground for stock picking ," says Yadava, who is definitely not a stock picker at iShares.

Miller isn't either. They pick fund managers to look deep into South Korea. Schroders, the London-based asset manager, does it for them from Hong Kong. "Samsung Electronics is a must-own," says Miller, looking up his Asian portfolio of 60 stocks. He shares a few names: Mando Corporation; SK Materials, up 422% in five years;  and internet company Naver Corp, up over 220%.

Brendan Ahern, CIO of KraneShares in New York, says Naver is part of the overall Asian tech story. That's attracted him more to Naver than the macro outlook in South Korea.

"These internet and e-commerce stocks are really the transmission engine for domestic consumption," he says. "We've been in a growth stock market and value plays have lagged and so companies like Naver are greatly outperforming, regardless of where they are from in Asia. If you look at 2014 they pulled in 2.8 trillion won ($2.6 billion) in revenue and by 2017 they hit 4.7 trillion ($4.5 billion)," says Ahern. "You're talking about a company that is growing and you ultimately have to pay for that."

Naver trades at 31 times earnings compared to around 10 times trailing earnings for Samsung Electronics.

MSCI Korea earnings are forecast to grow 25% in 2018 and it’s not all Samsung Electronics (forecast to grow 18%).

Edmund Harriss, a fund manager with 14 years Asian investing experience over at Guinness Atkinson in London says he thinks Korean shipbuilders turn the corner this year. Other sectors to watch include IT and consumer discretionary. Financials, staples and telecom are expected to remain weak.

"I like Hanon Systems and LG Household & Healthcare," he says. Both stocks are trading lower year-to-date. Hanon is an auto-parts maker focusing on climate control. LG Household is a play and Chinese tourism and their love for Korean cosmetics. "I still find myself underweight Korea by about 7% to 10% depending on which strategy and which benchmark you're looking at," Harriss says.

Roughly 30 years ago, South Korea was in a different place. It had just finished its first ever Summer Olympics in 1988.  Their government did not have the capital to help fund its athletes and South Korean households didn't have the kind of money they have now to spend on leisure and sporting activities.

It was never known as a hub for skiing, snowboarding and skating, a traditionally more difficult and expensive sport. There was also no Samsung Galaxy back then, and Hyundai's were considered cheap little matchbox cars in the United States.

But times have changed. Mostly everyone is familiar with Hyundai or has a Samsung smart phone. South Korean incomes are the highest of any MSCI emerging market. They even have a figure skating champion now, Yuna Kim, the athlete who lit this year's Olympic cauldron on opening night.

"She represents South Korea’s efforts to nurture its talents and innovation," says Elli Lee, a research analyst with Matthews Asia, a San Francisco-based mutual fund company. "We see this in the widening appeal of its K-Pop pop culture trends, advances in marketing and developing everything from cosmetics to semiconductors," she says. "The Olympics are an opportunity for South Korea to show how it has become a global leader in innovation across a variety of industries," Lee says.

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Кайрат Крымов
владелец Tastai Property Management
Хроники бизнесменов. Владимир Ким

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