South Korean stocks hit record high despite threat from North

An Armageddon-scale threat from North Korea, an impeached president and boycotts from China have not deterred investors from South Korean stocks.

The Korea Composite Stock Price Index (Kospi) - the country's main equities benchmark - has been defying the odds in the past year. Yesterday, it gained 0.16 per cent, hitting a new high of 2,429.94.

This brings the Kospi Index's total return in the year-to-date to more than 18 per cent in Singdollar terms.

The Straits Times Index, which has also rallied in recent months, saw a 14.7 per cent gain in the year-to-date.

South Korea also ranks second in Asia for equity inflows in the year-to-date, registering US$9.1 billion (S$12.4 billion) of net inflows.

Not surprisingly, South Korean exchange-traded funds (ETFs) have also done well.

INVESTMENT FUNDS

ETFs are investment funds that are listed and traded intraday on a stock exchange and track the performance of an index.

On the Singapore Exchange (SGX), the ETFs tracking the MSCI Korea Index were the two best performers.

The db x-trackers MSCI Korea UCITS Index ETF (DR) and Lyxor MSCI Korea UCITS ETF generated total returns of 20.7 per cent and 19.9 per cent respectively in the year-to-date, according to a July 7 SGX report.

Betting on Samsung - which makes up nearly a third of MSCI's Korean measure - has been a profitable strategy over the past two years due to its strong share price performance relative to the index. Bloomberg report

The MSCI Korea Index tracks the performance of the large and mid-cap segments of the South Korean equity market.

It is made up of 112 constituents, and covers about 85 per cent of the South Korean equity universe.

Over the last 12 months, both ETFs posted total returns of 36.1 per cent and 35.5 per cent respectively, and ranked first and third among all ETFs on SGX.

Other ETFs that track Asian stock markets have also fared well in the past year.

The 10 best-performing ETFs on the SGX are Asian ETFs, which averaged a total return of 17.8 per cent in the year-to-date.

This brings their one-year total return to 27.5 per cent, with an annualised three-year return of 7.1 per cent, noted the report.

The remaining eight ETFs among the top-10 track China, India, as well as broader Asia-Pacific ex-Japan and Emerging Asia regional indexes.

Amidst the global stock rally, analysts point out that the South Korean stock market's stellar performance this year can also be attributed to its information technology (IT) sector.

It holds more than 45 per cent of the index's weight, and includes names such as Samsung Electronics and LG.

The IT sector was the best-performing sector, averaging a total return of 47 per cent in the year-to-date in Singdollar terms, noted an SGX report.

In particular, Samsung has pushed both the MSCI Korea and Kospi indexes to record highs, noted a Bloomberg report last week.

"Betting on Samsung - which makes up nearly a third of MSCI's Korean measure - has been a profitable strategy over the past two years due to its strong share price performance relative to the index," noted the report.

Samsung's stellar performance is largely due to the strong global demand for semiconductors.

The global memory chip leader announced earlier this month that its quarterly operating profit will likely hit an all-time high. Its second-quarter operating profit likely jumped 72 per cent from a year earlier to 14 trillion won (S$17 billion).

Like its home country, Samsung's record growth occurs despite a tumultuous year for its leadership.

In February, Samsung heir Lee Jae Yong was arrested for his alleged role in a corruption scandal that led the South Korean Parliament to impeach then president Park Geun Hye.

Prosecutors had accused Samsung of paying bribes worth 43 billion won to organisations linked to Park's friend, Choi Soon Sil, to secure the government's backing for a merger of two Samsung units. The investigation will be a long-drawn process.

PROBE

On Monday, the Korea Herald reported that South Korean prosecutors have launched a probe into documents purportedly written by Park's government regarding the leadership succession of Samsung.

But analysts also pointed out that the landslide victory of new leader Moon Jae In has been viewed favourably by investors.

Firstly, he is seen as a good candidate to defuse North Korean tensions - believing in the complete de-nuclearisation of the Korean peninsula and in the resumption of economic cooperation with Pyongyang.

Mr Moon's election promise includes structural fiscal policies to create more jobs, as well as limiting chaebols' (large family-owned business conglomerates) power and improving their corporate governance, noted a DBS report in May.

Mr Kim Iskyan, who runs financial publishing firm Stansberry Churchouse Research, thinks South Korea has a lot of room to play catch-up on a longer-term basis.

He said in a July 4 note that the South Korean stock market is up only 39 per cent over the past five years, compared to 49 per cent for the MSCI Asia ex Japan Index and 70 per cent for the MSCI World Index.

He said: "As we have seen in the US, the hope of new policies can move markets - a lot. Investors in South Korea are buying into the hope that things will change with its new leader.

"They are banking on Mr Moon being able to improve foreign relations, reduce income inequality and unemployment and crack down on conglomerate favouritism."