`Anti-Foreign Sentiment Accelerates Foreign Selling
By Lee Hyo-sik
Staff Reporter
Foreign investors have massively sold shares over the past months because of Korea's anti-foreigner sentiment and questionable corporate governance associated with conglomerates, according to a senior executive of a U.S.-asset management firm Wednesday.
Mark Mobius, managing director of Franklin Templeton Asset Management, told reporters that global investors have taken money out of the Korean stock market on uncertainties concerning the country's treatment of non-Korean investors and the obscure governance structure of large business groups.
``There are two reasons why foreign investors are fleeing the country. The first is what has been happening with Lone Star Fund's sale of the Korea Exchange Bank (KEB). The second is the chaebol's corporate governance,'' he said.
Lone Star Fund has been trying to sell its stakes in the Korean bank over the past few years to realize large capital gains on its investment. But the government has blocked the sale, raising legal questions over its acquisition of the bank back in 2003 amid rising anti-foreigner sentiment in the country.
However, Lone Star recently signed a contract with HSBC to sell its 51-percent stake in the KEB even though a local court is still deliberating on the legality of its KEB takeover.
``Foreign investors fear the Korean government may take measures against them and also chaebol may act against minority shareholders, including foreign ones. These are uncertainties, which investors hate the most. These factors are in the minds of investors globally, as obviously these are not unique to Korea but also in other emerging markets,'' Mobius said.
When asked about Korea's benchmark KOSPI's possible inclusion in the Financial Times Stock Exchange (FTSE) Group's developed world indices, Mobius said the Korean market should not be included either in the FTSE or in the Morgan Stanley Capital International (MSCI) index. ``Korea should be left as an emerging market because the country will merge with North Korea in the future, which will significantly bring down per-capita income.''
He also said it is premature to replace the Korean market with Chinese A share market because China will not allow foreigners to enter the market as freely as Korea. China is now trying to encourage an outflow of capital from the country to ease asset price hikes and inflationary pressure.
``Shares listed on Hong Kong will receive a further boost and be more attractive to foreign investors as the Chinese government is set to allow local investors to purchase H shares. Also, Hong Kong is part of China and its stock market should not be included in FTSE index and be regarded as emerging market,'' Mobius said.
When asked about effects of the second inter-Korean summit and North Korea's agreement to dismantle its nuclear program on the country's stock market, he said these factors are already discounted on the market.
``But when foreign companies can directly invest in North Korea, the Korean market will get a boost as more foreign investors will purchase shares in Korean firms that can do business in the communist country. But such a scenario will not likely materialize any time soon.''
Among the emerging market that is increasingly popular with global investors, he said investors are giving more weight to Hong Kong H shares and Thailand in terms of current valuation relative to growth and price earnings ratio (PER).
``Taiwan is also attractive because many companies do business in China and will benefit more when its next president improves relations with mainland China.''
He also said the fallout from U.S. subprime mortgage defaults will likely linger on the broader economy over the next three to four years, while its risks have already been discounted on the market.
``If the U.S. Federal Reserve aggressively cuts a key interest rate at its upcoming policy meeting, it will be a plus to investors. But if it decides not to, the U.S. market will likely undergo sharp corrections.''