Baring Korea Feeder Fund

Manager comments

This commentary relates to the month of November 2017- to be read in conjunction with the factsheet.

In November, strengths of the Korea Composite Stock Price Index (KOSPI) shifted to the Korean Securities Dealers Automated Quotations (KOSDAQ) and ended slightly lower, as the latter surged past the 800 mark in more than 10 years, driven by the healthcare sector and speculation on the government’s support to boost investments into small-mid cap companies. The Korean won dropped to a near-two-year-low against the US dollar as North Korea stayed dormant for most of the period and the Bank of Korea confirmed a 25 basis points (bps) increase in interest rate on the last day of the month. The Fund registered a strong absolute gain and outperformed a falling performance comparator, primarily driven by bottom-up stock selection. Media production and broadcasting company Studio Dragon was a notable contributor to relative performance, as share price was supported by the company’s increased earnings visibility and value in media contents. Meanwhile, the structural lack of exposure to Samsung Electronics contributed positively as stock price followed the technical sell-off in IT sector globally in November as investors were looking to take profit on year-to-date outperformers. Hanmi Pharmaceutical, a key healthcare holding, also added to the outperformance as the company reported solid quarterly results and stronger outlook for its drugs in pipeline. 

Despite the growing concerns that higher Fed Funds rates could be an obstacle for Korea and emerging market’s outperformance eon higher opportunity cost, Fed tightening should not be an impediment for Korean equities to post another solid year of returns in 2018. Fed rate hike cycle is in response to an improving growth outlook and the primary reason for investors taking the risk of allocating into Korea market is premium growth leveraging on synchronized global growth. Korea remains well positioned in terms of its long-term growth outlook as well as the gradual recovery in global demand that has been progressing. A global cyclical upturn appears underway, spurred by US fiscal stimulus. The Trust is positioned to favor Korean companies which we believe are likely to benefit from a benign economic environment and where we see potential for earnings to exceed expectations. The Fund will maintain its focus on solid long-term beneficiaries across different sectors. Key themes include: (1) beneficiaries of changing growth dynamics of the technology and mobile internet; (2) beneficiaries of changing automobile dynamics such as Advanced Drive Assistance System and electrical vehicle; (3) beneficiaries of new technologies, growth segments or niches, and leading edge R&D; (4) beneficiaries of benign input costs and superior manufacturing process/competitiveness; (5) improving corporate governance and improving capital management. 

Korean equity market is likely to maintain its solid performance into next year supported by good global growth, structurally and fundamentally solid IT sector, signs of improving domestic demand, and supportive policies ahead of the National Election in Jun 2018 could support the market. The more stable political environment coupled with the prospect of a global growth pick up, along with an emerging market growth recovery, is conducive to further improvement in Korea’s growth. In addition to global recovery, Korea has its own unique factors and “niches” of growth benefitting from changing growth dynamics that will outpace overall growth. We continue to see volatility as a good opportunity to gain exposure to long-term winners. Korea is in a key position in terms of economic development and technological level. It is usually at the top of the list of R&D investment versus GDP, investing in new technologies and manufacturing areas. It is in these, leading edge sectors and companies where much of Korea’s growth will come. We see a myriad of potential strong growth names that benefit new trends in technology in the global economy. 

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