South Korea: Stock market quotes higher than before Corona outbreak - three promising investment ideas

Translated from German by Deep Knowledge Group.

Original article by Jürgen Büttner for Börse Online: Börse notiert höher als vor Corona-Ausbruch - drei aussichtsreiche Anlageideen (30.09.2020).

Over the past 50 years, the Seoul stock exchange has gained an impressive lead. It would be hard to top. But the country is definitely well situated. We present three promising investment ideas.

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When investing, think long-term. That's what experts preach time and again. Investors who took this advice to heart and also bet on South Korea were spot on. According to calculations by Deutsche Bank, the South Korea exchange achieved the best results in real terms globally with an average of 9.9 percent per annum in the past 50 years. For comparison: Germany only gained 5.2 percent in the same period.

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Since the end of the Korean War in 1953, the country has successfully worked its way up from an agricultural country to a leading industrial nation. The East Asian Republic also mastered the Covid 19 pandemic in an exemplary manner. The think tank Deep Knowledge Group ranks South Korea as the third safest country in the world for Covid-19.

Korea's leading index KOSPI is now trading higher than before the outbreak of the coronavirus. However, a major hurdle awaits the index now, around eight percent away, in the form of the record high set at 2598 points in early 2018. A sustained technical buy signal is only generated when this hurdle is cleared.

Why this can succeed

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There are several reasons this can succeed. The exporting country is likely to experience an economic tailwind from the recovery in world trade that has begun. Although the central bank has just lowered its forecasts, according to the International Monetary Fund, gross domestic product is only likely to shrink by 1.2 percent in 2020. That is comparatively little. This is to be followed by growth of 2.8 percent in 2021.

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Asset manager Franklin Templeton also praises this solid economic positioning: "Korea has invested long-term in its population as well as in research and development and has thus become an open economy that is classified as an export powerhouse." These efforts have produced several well-known global exporters. Leading semiconductor and battery manufacturers, for example, supply hardware that is important for a modern economy to function. In difficult times, like now, when solid balance sheets count, the cash holdings of South Korean companies are an advantage because they are among the highest in the world in terms of market capitalization.

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The earnings outlook could also prove to be a potential price driver. The analyst consensus expects a drop in profits of a good 45 percent this year. In the coming year and the year after that, however, profits are expected to rise by more than 18 percent and almost 44 percent respectively.

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The result of a test carried out by the Société Générale also speaks well for the country's stock exchange. The major French bank examined fundamentals (valuation, profits, debt), positioning (capital flows from foreign investors), price momentum, currency stability and the influence of tensions between the US and China. The overall result shows South Korea as the best stock market among twelve Asian countries.

Three investment tips

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Due to the overall positive summary, we recommend betting on the local stock exchange. A good choice here is the HSBC MSCI Korea Capped ETF, which has achieved the best five-year performance of the South Korea funds and ETFs approved in Germany. When looking for promising individual stocks, the crux is the small number of South Korea stocks traded on German stock exchanges. Shin Poong Pharmaceutical is not represented in this country. The market value of this pharmaceutical company exploded this year from the equivalent of 0.3 billion to 7.4 billion euros, because the in-house antimalarial drug Pryamax is considered to be a beacon of hope in the fight against Covid-19.

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While the valuation here is now extreme, it is moderate with a single-digit price-earnings ratio for 2022 at Samsung Electronics. And that despite the fact that it is the country's flagship company. The family-run company can score points with its dominant market positions in storage units, OLED technology for screens and consumer electronics. In addition, society should benefit from growth trends such as smartphones and the expected price recovery for memory chips. Samsung recently launched two new products: a revised and improved version of the foldable smartphone Galaxy Z Fold 2 and the new Galaxy Watch 3 Titan - both of which should generate sales growth in the Christmas season.

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We also rate the subsidiary Samsung SDI as promising. The company produces rechargeable batteries for the IT industry, for cars and energy storage systems as well as top-quality materials for the manufacture of semiconductors, displays and solar panels. There are a lot of prospects in the batteries for electric cars and e-bikes, especially since the board has promised significant progress in terms of range. The expansion plans of US competitor Tesla pose a risk, but the battery business is a relatively large market that leaves space for more than one player. So it should continue with strong growth, which should continue to push the course of Samsung SDI.

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