InvestmentsOct 22 2014

Lazard’s Russell unmoved by South Korean reforms

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Reforms by South Korean politicians designed to boost the attractiveness of the country’s firms to foreign investors have failed to woo Lazard’s Stephen Russell.

The manager of the group’s $65.7m (£41m) Emerging Markets Core Equity fund said he will remain underweight the country even though its government has tried to incentivise companies to boost dividends.

The manager has 9.7 per cent of his fund exposed to South Korean companies, in part because of his positive view on its macroeconomic story.

But in spite of a $40bn stimulus package announced in July aimed at boosting domestic demand and the property market, plus a tax incentive for companies to increase dividends or wages, he will not increase his weighting towards the 15.6 per cent in the MSCI Emerging Markets index benchmark.

Some managers have backed the reforms. James de Bunsen, multi-asset fund manager at Henderson Global Investors, told Investment Adviser in September that the tax reform would be a “game changer” for South Korean equities.

However, Mr Russell says the companies on offer are not appealing. “Korean companies are cyclical companies and now is not a good time to buy them. Plus the return profile of these companies is barely covering the cost of their capital,” he said.

He warned that, as China’s growth slows, South Korea will take a hit, since China is one of its major export partners.

China’s GDP growth statistics for Q3, which are due to be announced next week, are expected to be the weakest quarterly figures since Q1 2009.

Mr Russell also warned that several sectors, including the industrial sector, suffer from overcapacity, which results in a difficult pricing environment.

Meanwhile, in spite of slowing GDP growth, Mr Russell has been adding more Chinese equity stocks to his portfolio.

In particular, he is keen on logistic chain companies, since the market is in consolidation.

He recently purchased Sinotrans, one of the largest logistics companies in China.

Mr Russell also bought shares in the record-breaking initial public offering of Alibaba, the Chinese e-commerce phenomenon, and thinks the sector is a leading area of interest. However, he sold the shares when they reached his price target. He is currently re-evaluating the company, since the stocks have pulled back.

The firm, which peaked at 93.89p at launch, has pulled back to 85.15p as at October 15.

Mr Russell is also underweight Brazil. His portfolio has 7.4 per cent in the country, while the index holds 10.9 per cent.

“There was an investor euphoria for Brazilian equities when investors thought Dilma Rousseff was being displaced. But my view is the market is far too expensive and her departure isn’t certain.”

Brazil is in the middle of campaigns for its second round of elections, which will be held on October 26. Ms Rousseff is up against Aécio Neves, the president of the pro-business Brazilian Social Democracy Party. The contest is considered to be the closest in generations.