Korea's political turmoil makes managers wary of equities

Political scandals, corporate governance issues and the potential impact of Donald Trump's trade policies prompt caution on Korean equities. 

The impeachment of South Korean president Geun-hye Park in December following a corruption and cronyism scandal sheds light on the politician-chaebol nexus in South Korea, said Krishnendra Dubey, assistant manager of investment research and analytics at consultant Aranca.

Park is alleged to have abused her position to help an aide secure tens of millions of dollars of funding from chaebols for her foundations.

"It further exposes the crony capitalism pervading the South Korean economy and raises corporate governance issues.

Equity investors should be wary of “investing in a country facing political and policy paralysis, and an ever burgeoning political scandal threatening to engulf some of the biggest corporates and politicians in the nation”.

Governance issues

Norman Boersma, CIO of Franklin Templeton Investments' Templeton global equity group, added: "Many of Korea’s best companies are still controlled by a handful of powerful families via small equity stakes and complicated cross-shareholding structures that can disadvantage minority shareholders.  That is changing slowly, but not always for the right reasons.”

Equity investors should be wary of "investing in a country facing political and policy paralysis, and an ever burgeoning political scandal threatening to engulf some of the biggest corporates and politicians in the nation".

Boersma manages the Templeton Growth Fund, which holds two chaebol stocks: Samsung Electronics, the top holding accounting for 3.05% of portfolio as of November-end, and Hyundai.

However, he noted that although corporate governance is not ideal in the country, he sees value in holding the chaebol stocks.