Watch Out for the Korea Discount
Korea Equity FVMR Snapshot – December 2016
Korea is a special market when it comes to valuation and profitability relative to other markets. There is something called the “Korea Discount” which you should learn more about before you consider the Korean market. Andrew wrote a post on it, and you can check it out here: Why Are Korean Stocks So Cheap?
Fundamentals
ROE is below the World average in most Korean sectors. Consumer Staples has an expected 17CE* 12.5% ROE and is the only sector that is on par with the World average. Info Tech and Health Care have a good profitability relative to the Korean market, while Financials, Materials, and Industrials offer the worst profitability in the country.
Korean companies have an exceptionally low dividend payout ratio, only Telecoms is on par with the world average. Learn more about the low dividend payout ratio in Korea.
Valuation
Relative valuation versus other markets may not be that relevant due to the Korea Discount, so let’s have a look within the Korean market. Only three sectors trade above book value on 17CE*: Health Care, Consumer Staples and Info Tech.
Utilities is most attractive at a 17CE* 23.9% ROE/PB, compared to the Korean average of 10.3% ROE/PB. Looking at PEG ratio, Industrials and Info Tech are most attractive; both trading at a 17CE* PEG ratio of 0.4. Health Care is relatively expensive on both 17CE* ROE/PB and PEG.
Momentum
Industrials and Health Care are expected to turn to strong EPS growth in 17CE* from earnings contraction in 16CE*. Consumer Staples has more stable expectations with double-digit earnings growth in 16-17CE*. Info Tech is also expected to see a good 17CE* in terms of EPS growth.
Info Tech and Energy have shown the best one-year price performance, while the two Consumer sectors and Health Care have performed poorly over the past one year. In the short term, past two weeks, Consumer Staples has performed best and Industrials the worst.
Risk
Korean companies have lower gearing on average, only Utilities and Industrials have a relatively high gearing. Utilities is a sector that normally has relatively high gearing, so it’s mainly Industrials that stands out compared to other markets. Note that Industrials as well as the rest of Korean sectors have decreased gearing during the past 12 months.
Korea is more volatile than the world. In the past one year, Korean Health Care has been most volatile and Consumer Discretionary least volatile. In the past three months, Health Care, Info Tech, and Utilities have been very volatile and no sector has been less volatile than the global average.
*CE is Consensus Estimates
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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.