Investment Adventures in Emerging Markets

Asia

South Korea: A Shining Example of Emerging Market Leadership

Our emerging markets equity team has often emphasized how emerging markets have evolved over the decades in ways many investors may not realize. Today, emerging economies boast many cutting-edge companies that are industry leaders. And, many countries have learned valuable lessons from prior crisis periods that have helped them navigate the current coronavirus pandemic. South Korea is one such example of both.

This post is also available in: French

As a team, we are embedded in emerging markets. Being on the ground across 15 countries, we see first-hand the transformation that has taken place in the last couple of decades—an evolution that in some areas is even accelerating amid COVID-19. This new reality in emerging markets is characterized by increased institutional resilience, improved economic diversification and the emergence of world-leading emerging market (EM) companies. In many cases these EM companies are leapfrogging developed market peers through new business models, often facilitated by superior infrastructure and intellectual property.

Institutional Resilience

South Korea stands out to us as illustrative of the aforementioned factors, and also as an example in terms of its handling of the COVID-19 pandemic. In our view, its exemplary response to the crisis reflects well on the quality of governance and social cohesion of the country. Similar to Japan, the country did not impose a lockdown, yet has achieved minimal deaths per capita.

The country has learned from previous regional health crises, and thus its economy and health system were prepared for this one. South Korea has for many years pursued prudent economic policies, resulting in low government debt. Crucially, it entered this crisis having had a negligible fiscal deficit of 0.3% last year, a fraction of the level of most developed markets.

Economic Diversification

In terms of the broader economy, South Korea has not been blessed with vast natural resources—on the contrary, oil imports are among the highest in Asia as a percent of gross domestic product. And despite having ample natural beauty and a rich distinctive culture, tourism has never been central to the economy.

The results are twofold. Near term, the country has disproportionately benefited from the crash in oil prices, while also seeing little economic impact from the collapse in international travel. But more importantly, over the longer term, Korea has invested in its people, in research and development, and has become an open economy—it’s an export powerhouse.

World-Class Companies

Furthermore, a number of South Korean exporters are of global importance, supplying hardware that enables the modern economy to function. World-leading semiconductor and battery makers are benefiting from the secular trends of increased computing power and greener mobility—some of which are accelerating due to the pandemic. Think of the massive increase in demand for cloud computing (and therefore data centers) driven by working from home and video conferencing. Or the potential uptick in e-bikes and car sales (an increasing proportion of which are electric) as people seek to avoid crowded public transport.

South Korea’s advantages in innovation and intellectual property are also evident in the health care sector—ranging from virus test kits to biologics—which have undoubtedly been supportive during this crisis. The country’s internet sector has also been thriving amid social distancing.

South Korea’s fiscal prudence is also replicated at the corporate level; the proportion of non-financial companies with net cash balance sheets is considerably above the global average (and more than double that of the United States).1  Viewed another way, cash holdings as a percent of total market capitalization are among the highest in the world. Balance sheets once derided as inefficient now look more appropriately conservative as companies globally seek government bailouts.

Admittedly, corporate governance has for a long time been a key challenge of investing in South Korea;  complex chaebol holding structures, poor returns to shareholders and the more egregious issue of corruption have resulted in a discount being applied to many Korean companies. However, this is an area undergoing vast improvements, with a corporate governance code becoming compulsory for large companies (those listed on the KOSPI Index) in 2019. Various instances of engagement with companies are increasingly yielding results, evidenced by improving shareholder returns, public apologies and restructurings.

In short, South Korea exemplifies many of the trends we see increasingly driving emerging markets—an environment that facilitates superior earnings growth of globally competitive sustainable companies.

To get insights from Franklin Templeton delivered to your inbox, subscribe to the Investment Adventures in Emerging Markets blog.

For timely investing tidbits, follow us on Twitter @FTI_emerging and on LinkedIn.

 

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Companies and case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

 

What Are the Risks?

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity.

______________________________________________

1. Source: Bloomberg, based on MSCI Indexes. Excludes financial companies, as of April 2020. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. See www.franklintempletondatasources.com for additional data provider information.

Leave a reply

Your email address will not be published. Required fields are marked *