With tensions rising on the Korean peninsula, events in North Korea have been dominating the news and continue to cast a shadow on its neighbour, South Korea. What are the potential investment risks and opportunities for investors?
While North Korea's leader Kim Jong-un appears to be developing nuclear capabilities for his political security and that of his regime, in our view, the risk of a nuclear conflict on the Korean peninsula is slim.
Tensions from North Korea have often come in the past and have resolved peacefully. While we may see some further escalation, a full scale war could cause unthinkable damage to the region. A positive outcome out of this complicated situation is that it may force North Korea, South Korea, the U.S. and China to finally engage in a multi-lateral dialogue.
Thus far, the way the market has reacted to the tensions has been muted. We have not seen a sell off yet, and there appears to be no obvious market dislocation. Investors also seem unmoved, with there being little, if any, redemption triggered by the current political situation.
We continue to be bullish on the prospects for South Korean companies. First of all, the tensions have not had a lasting impact on the fundamentals of the companies we hold. As it stands today, South Korea has been one of the best performing markets this year. At the end of August, over 21% of the Matthews Asia ex Japan Dividend fund's allocation was in the country, while within the Matthews Asia Dividend fund, the weighting was nearly 16%. If catastrophe were to strike, then both portfolios might take a short-term hit. One thing to keep in mind is that North Korea's objective is survival and the markets have been relatively calm knowing that all parties involved do not want a war.
However we are not short-term investors, and despite South Korea's strong performance this year, the country's valuations remain at low levels. There is the perennial Korea discount, which in our view is firstly caused by potential tension with North Korea, and secondly by poor corporate governance practice.
While the first of these two factors show no immediate signs of improving, corporate governance practice in South Korea is more likely to move in the right direction owing to shifts in the government policy to encourage higher dividend and shareholder pay-outs.
For the time being, we believe the current Korean discount may remain in place. If it were to widen more, it may create further investment opportunities for our portfolios.
For our latest views on investing in Asia, please visit https://global.matthewsasia.com/income
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