· While South Korea’s GDP in 2Q24 has fallen below consensus estimates due to subdued domestic demand, we believe a greater economic expansion has yet to come for the rest of the year on the back of the semiconductor upcycle.
· South Korea is home to two large semiconductor players Samsung and SK Hynix which collectively make up more than 70% of the global DRAM market and 50% of the NAND chip production.
· With the burgeoning demand for artificial intelligence, we expect chips exports to grow and this in turn may support South Korea’s economy and stock market.
· The JPMorgan Funds – Korea Equity Fund A (acc) USD looks to generate most of its alpha through stock selection, utilising an investment style that incorporates value, growth and quality attributes.
· The fund has also managed to deliver strong cumulative and annualised performance over the last decade, making it the stand-out pick for any investor who wishes to invest in South Korea.
In 2Q24, South Korea’s GDP expanded by 2.3% YoY but declined by 0.2% QoQ, failing to meet consensus estimates of a growth of 2.5% YoY and 0.1% QoQ respectively. This is attributed to smaller consumer spending as private spending remains subdued due to high interest rates and persistent consumer inflation.
Based on the latest developments, the Bank of Korea is maintaining its restrictive benchmark interest rate because it is concerned that premature rate cuts could encourage more housing purchases and contribute to a real estate bubble.
Moreover, on 5 August 2024, the KOSPI fell by more than 8%, triggering a trading halt by the Korea Exchange for 20 minutes. Led by Samsung Electronics and SK Hynix, this selloff was due to fears that tech stocks may have gained beyond their earning potential.
In this article, we address why we still find South Korea attractive despite its recent market selloff as well as its slightly disappointing 2Q24 GDP numbers and highlight a fund for this market.
South Korea: Burgeoning chip demand to drive its economy and stock market
Although South Korea’s GDP for 2Q24 came in below market expectations, we expect the overall economy to expand at a robust pace this year due to strong external demand for its chips, driven by tailwinds of artificial intelligence. This is especially so as South Korea remains a key semiconductor powerhouse that is home to both Samsung and SK Hynix. It is also worth noting that collectively, these two companies make up more than 70% of the global DRAM market and 50% of the NAND chip production.
In June 2024, semiconductor exports surged by 49.4% YoY to USD 13.4 billion largely due to semiconductors and rechargeable batteries as global demand for artificial intelligence and electric vehicles grew. The nation’s trade balance also surged to USD 8 billion in June 2024, the biggest since 2020.
Figure 1: Chips continued to experience a structural surge in demand
Figure 2: South Korea’s trade surplus continued to grow on the back of increased chip exports
Moreover, the strong performance of the US economy, South Korea’s key trading partner, has been beneficial for companies like Samsung Electronics, as US firms such as NVIDIA increase their orders.
While South Korea’s lacklustre domestic demand may pose concerns, we expect its exports to be a key driver of its economic expansion this year. Moreover, both Samsung and SK Hynix are large constituents of the Korea Composite Stock Price Index (KOSPI). Hence, secular tailwinds benefitting these companies would boost not only the nation’s economy but also its stock market.
JPMorgan Funds – Korea Equity Fund: Chip into South Korea’s chips dominance with this fund!
For investors looking to seize the opportunities arising in South Korea, the JPMorgan Funds – Korea Equity Fund A (acc) USD could be an option. This fund looks to generate most of its alpha through stock selection utilising an investment style that incorporates value, growth and quality attributes.
This is done so through the vigorous validation of investment thesis and fundamental analysis. On top of fundamental analysis, the fund manager would also combine local knowledge by sending its specialists for company visits and research to identify investment ideas. Moreover, the fund has a long track record as it was incepted back in 2007, a reflection of the expertise of its investment team, which has an average of 23 years of experience.
Table 1: Three primary attributes that the investment team focuses on
|
Attribute |
Description |
|
Value |
Quantitative analysis in evaluating the value and profitability of the company |
|
Growth |
Companies that exhibit sustainable earnings growth in excess of the market though an economic cycle |
|
Quality |
Companies that possess competitive advantage, reliable management and/or strong financial conditions |
|
Source: JPMorgan Asset Management |
|
The fund’s benchmark is the KOSPI, however, it is only a performance comparator and the fund may bear little resemblance to it. The KOSPI was chosen as it reflects the main investment universe and strategy for the fund.
Looking at the fund’s sectoral breakdown, it has the largest exposure in Electrical & Electronics Equipment (28.2%) due to the fund manager’s positive view on the improving memory chips cycle, and notable exposure in Finance (17.1%) as of 30 June 2024. We note that it is not uncommon to see these sectors in a South Korea fund considering that they collectively form more than half of the South Korea equity market.
Relative to its benchmark, the fund is overweight in Manufacturing (6.2%), Chemicals (5.2%) and IT Hardware (3.3%) while it is heavily underweight in Electrical & Electronic Equipment (-12.2%). While the fund manager has a positive outlook on the memory chips cycle, the underweight position in the sector may be due to the UCITs “10% rule”. The rule caps any individual stock position at 10% of the portfolio. This resulted in the fund’s enforced underweight in Samsung, which makes up more than 10% of the benchmark.
Figure 3: Sector breakdown of fund
The fund typically maintains a concentrated portfolio, with its top ten holdings currently making up nearly 50% of the portfolio. As of 30 June 2024, it holds significant positions in Electrical & Electronic Equipment stocks such as Samsung Electronics (9.9%), SK Hynix (9.9%) and Samsung Electro-Mechanics (2.8%).
Table 2: Top ten holdings
|
Rank |
Holding Name |
Sector |
Net Assets (%) |
|
1 |
Samsung Electronics |
Electrical & Electronic Equipment |
9.9% |
|
2 |
SK Hynix |
Electrical & Electronic Equipment |
9.9% |
|
3 |
Shinhan Financial |
Finance |
4.0% |
|
4 |
LG Chem |
Chemicals |
3.6% |
|
5 |
Samsung Biologics |
Medical Supplies |
3.6% |
|
6 |
Hyundai Motor |
Transport Equipment |
3.6% |
|
7 |
Samsung Electro-Mechanics |
Electrical & Electronic Equipment |
2.8% |
|
8 |
Samsung Life Insurance |
Finance |
2.7% |
|
9 |
Naver |
Services |
2.6% |
|
10 |
S-Oil |
Chemicals |
2.6% |
|
|
Total |
45.3% |
|
|
Source: JPMorgan Asset Management., iFAST Compilations Data as of 30 June 2024 |
|||
Relatively strong performance against its peers
Over the last decade, the fund has largely outperformed its benchmark and peer fund in terms of cumulative returns, making it an attractive choice in the active investment space. As of 30 June 2024, the fund delivered a cumulative return of 37.8%, outstripping that of the KOSPI (0.8%) and LionGlobal Korea Fund (29.4%).
Figure 4: Solid long-term performance
Looking at year-to-date returns and the annualised 1-year, three-year and five-year periods, the fund has outperformed the benchmark in all periods and has remained competitive against its peer fund.
Figure 5: Performance against the index and peer
Over the past year, the outperformance may be due to overweight positions in SK Hynix and a number of financial stocks such as Kiwoom Securites, Hana Financial Group and Samsung Life.
Figure 6: Share price performance over the past year
The rally among these financial stocks were due to positive investor sentiment resulting from the government’s corporate reforms efforts – Value Up Program. The program looks to tackle the “Korea discount” where companies such as banks have consistently traded below their book value, valuations significantly lower than their international counterparts, despite strong cash flows and earnings. This disparity is often attributed to weak corporate governance and limited returns for shareholders. Hence, addressing corporate governance issues with tangible actions may drive further rally. Banks, with their currently low price-to-book ratios, are expected to be major beneficiaries of the program.
Figure 7: South Korea’s financial sector has been trading below book value against its regional counterparts over the past decade
Final thoughts
With the secular tailwinds of artificial intelligence benefitting major companies like Samsung and SK Hynix and corporate reforms, we expect South Korea to experience robust GDP growth and strong performance in its equity market.
For investors who want to chip into South Korea’s chip dominance, the JPMorgan Funds – Korea Equity Fund could be an option. The fund seeks to generate alpha by investing in companies with value, growth and quality attributes. It also has a strong track record of outperformance in both cumulative and annualised returns.
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