My Interview on Korea's Hankyung TV
Factors behind and issues created by the growing attractiveness of Korean stocks, European markets, leverage and other matters.
On the 18th of April, my colleague Oktay and I had a conversation on Hankyung TV (한국경제TV /Korea Business News/WOW TV), a 24-hour business and financial news channel owned by the Korea Economic Daily (한국경제신문), a business newspaper running since 1964 and South Korea’s largest business newspaper by revenue. Oktay gave me a transcript of his segment so here’s the video and transcript of the entire segment. Also, don’t mind my haircut and lighting!
My Q&A:
Q1. There has been a growing interest in the Korean market from the global market recently. What is the reason for this?
The predominant reason is a mixture of macroeconomic and geopolitical. In the former case, Emerging Markets (EM) - led, in order, by India and China - are forecasted to have the biggest growth in GDP over the next two years. This means an increase in general consumption. In EM countries, Korean companies have long had a substantial market footprint. In the latter case, Korea finds itself at the epicenter of a movement to diversify production out of China. While India's economic potential is substantially larger, the bulk of its industrial output is geared towards consumption by its 1.2 billion-strong (and growing!) populace. To feed the world's appetites, Korea - with its stable population and an entrenched corporate focus on building a global footprint - finds itself in a sweet spot.
Q2. Can you provide specific examples of movements in the market? (i.e. what is the flow of funds from global investors into Korea)
FSS statistics indicate that after a nearly 35% year-on-year (YoY) drop by value in foreign investor ownership in 2022, January alone showed a 15% jump in value. Given that KOSPI only went up by a little under 10% in January, this is highly indicative of a net "buy-in". Macro factors have also been helpful in making a case for Korean stock ownership. For instance, Japan's overweight ownership of US debt is estimated to have led Japanese investors into balancing their portfolios via heavy buy-ins into foreign equities. Korean stocks also benefit from calls on global portfolio managers to diversify beyond China. So far, Korean market trends have provided additional encouragement: the KOSPI is up by nearly 13% in the YTD while the S&P 500 and the tech-heavy Nasdaq-100 are up by nearly 8% and 20% respectively.
Q3. How do you think the outlook for the Korean stock market in the future?
All in all, the sweet spot for the Korean stock market is likely to continue over the course of this year (at least). Towards the end of January, the FSC announced some broad measures to improve international investor access such as the abolition of the foreign investor registration system, the expansion of scope for OTC transactions by foreign investors and disclosures in English for top-of-the-line companies. This will help enhance flows into the Korean market.
However, some market research issues can be foreseen in the future. For example, despite India forecasted to be the best-performing economy over the next two years, the NSE is down by around 3% in the YTD. This might be interpreted as there being no confidence in the economic outlook. However, the devil is in the details: Assets Under Custody (i.e. long-term holdings beyond a quarter) by foreign investors have remained constant over the last 3-4 calendar years and is even showing signs of an increase in the present year. However, tactical trading - mainly driven by multinational algorithmic entities - is estimated to have driven down market valuation in phases in the course of a trading session or short inter-day intervals, which domestic investors have proactively tended to buy up. Like India, Korea is a dynamic and energetic economy: a similar situation has enormous potential to occur, which will be hard to immediately attribute.
Another factor to consider is top-of-the-line companies' concerns over ceding control to foreign interests if international investor controls are eased. For such concerns, a dual-class share system might be a solution but it remains to be seen if this fear of loss of control would translate to roadblocks towards easing foreign investments.
Oktay’s Q&A:
Q1. What could be the reasons why foreign financial companies are viewing the Korean market positively and looking to expand their presence in the market?
South Korean investors are known for their active approach to trading. Tech stocks, thematic funds and leveraged ETPs – these are some of the most traded products among the more than 40 million trading accounts in the country… out of about 50 million people! Needless to say, this increasing retail interest in investing has captured the attention of foreign companies who are looking to satisfy that demand. And as this new generation of curious, informed, and tech-savvy Korean investors seek out new tools for their portfolio, foreign (and domestic) companies are likely to help equip them with exactly that.
With trading on mobile apps intensifying, it’s easier than ever to trade at the click of a button – local markets in the morning, European in the afternoon and US markets in the evening. We are witnessing the democratization of investing and access to tools once reserved for money managers.
Q2. Lastly, what issues should Korean investors pay attention to in the European stock market?
I would not necessarily call them issues, but the European stock market has some peculiarities compared to the US or Asian markets.
First you can often trade most instruments in multiple currencies – like USD, EUR, GBP, etc.
Next, trading hours. With many innovative products now available, many Korean investors can get exposure to their favorite instruments (stocks, ETFs) without having to wait for US markets to open.
Moreover, choice. Although the US ETP market is the oldest and biggest in the world, European markets still have a few advantages - like the availability of spot Bitcoin (and other crypto) ETPs and leveraged ETPs with daily leverage up to 5X.
However, there are some things that slow down the growth of Europe’s markets. In Europe, each exchange shows only its volumes, i.e. there is no consolidated tape. Each exchange only shows volumes on that venue. So a product may seem ‘illiquid’ with daily traded volume of, for example, just $100k in Paris – but it could trade $10M in London. So ETP and ETF investors don’t always see the whole picture.
Thanks to the innovation in the European markets as of late, the European ETP market is expected to grow at a faster rate than the US over the next 5 years (based on report from PricewaterhouseCoopers). So, the future looks bright.