Korea: Timing & Reasons to Invest.

The Most Recent Korean Export & Sensation: Gangnam Style!

The purpose of this email is to share with you on some of the rationale of the recent switch order that I have put in.

If you noticed, I have switched the funds from Lion Capital SG Fixed Income to Franklin Templeton Korea for Cheque and SRS, and Schroder Asian Growth Fund for CPF-OA

Timing Rationale

I have been waiting for another dip due to growth concerns around the world, so I could commit the last tranche of the bonds. However, that dip never materialized. In fact, the recent bad news from China only reinforce the month old market rally. Investors are looking out for the government to stimulate the economy each time the economy weakens and that seems to be the driving force behind the rally for now. Positive news from US with an improved employment and most importantly, retail sales figures despite coming off from a weak 2Q, reinforce the idea that the world is not in such a bad patch afterall. The Euro crisis has taken a back seat for now and it looks like the EU government once again, managed to delay the inevitable for another few months.  Some of the markets, especially SEA, have rallied quite a bit, but the North Asian Markets are being dragged down due to lacklustre news from Japan, China and South Korea. The North Asian stock markets are just beginning to rally and I will not want to miss out on the profits given the potential returns from these highly depressed markets will be quite good. The only fear I have now is the potential Israeli-Iran relationship, whereby the Israeli is threatening to launch a pre emptive attack on Iran's Nuclear facilities to prevent the Iranian government from developing nuclear weapons. However, the Israeli will find it hard to find support from their chief ally, US, given that it is only a few months more to the US elections, so this could be one of the black swan event that we pray that it will never happen until next year.   

Allocation Rationale

The China stock market, in my opinion, is a very attractive market right now, given that it is sold down quite drastically. Fund managers around the world have been quietly accumulating Chinese equities in the recent weeks where else local Chinese investors are fleeing from the stock market in doves and reallocating the capital into the property markets. The commodity markets also have been showing signs of bottoming out and staged a mini rally in recent weeks. All this point to the fact that the big players around the world are starting to turn their attention to that part of the world again. As I mentioned in my previous post, the Asian funds I use already has a big exposure to China and I will like to invest in a more diversified economy, such that should the China stock market miracle did not materialize, it will still perform relatively well. The answer is: Korea.

Korea's major trading partners are: China (27%), US (10%) and Japan(5%). Any improvement in the Chinese economy will lead to an immediate benefit to Korean companies. Having said that, the top Korean companies are now global titans that have diversified away from the dependence of Korea and Japan and is able to stand on their own, should there be a continual slow down in both economies. The Korea government is also actively trying to simulate their economy given the recent abysmal economical indicators and this will further spur the stock market.

The choice of Franklin Templeton Korea is pretty clear to most investors after my above explanations. However, I have a big headache for the limited fund selections of CPF-OA. After much deliberating, Schroder Asian Growth is selected for their high exposure to China, Taiwan, Hong Kong and Korea, with close to 80% of the fund invested in those 4 countries, with Samsung and Hyundai as top holdings in the fund. This fund has way to much exposure to China and Hong Kong for my taste, but that's the best I can come up with given the limitation of choice due to the CPFIS limitation.

This is of course, a very short explanation for the reason for the switch and there are much more other factors that I have considered, which I will not elaborate here as there are already complains that my explanations are getting too wordy. Do drop me an email or a coffee session will be good if you feel that you want to find out more.