BlackRock’s Andrew Swan has been piling money into South Korea through the recent correction as he believes the nation’s economy is set to reverse its fortunes.
Mr Swan had previously built up a higher weighting in the country than his benchmark, but added to his holdings through October because he thought valuations were unjustifiably low.
The Asian equities manager has focused particularly on cyclical companies, which are those firms exposed to the economic fortunes, both locally and globally.
He believes such companies, especially those seen as lower quality, are exceptionally cheap compared with higher-quality, dividend-paying stocks.
In his flagship, UK-domiciled fund BlackRock Asia, Mr Swan had 24.6 per cent invested in South Korea at the end of September, but he has been adding to the country since then.
He said the country’s market had been performing poorly this year, “driven by earnings downgrades, especially from cyclical companies”.
The strength of the currency, the Korean won, has been a particular headwind for cyclical companies, as it has appreciated versus the currencies of the country’s trading partners.
Since the start of this year, the MSCI Korea index has fallen 6.1 per cent in sterling terms, significantly outperforming the MSCI All Country Asia Pacific excluding Japan index, which has risen by 9.4 per cent, according to data from FE Analytics.
Most of that underperformance has come since the start of June, where the relative underperformance of South Korea to Asia as a whole has been 13.5 per cent.
But Mr Swan said that the period of earnings downgrades has “started to reverse” in the past month, and that profitability has now probably hit the bottom and will reverse.
He has used this as a buying opportunity, with valuations now “very compelling”.
Mr Swan said he had been adding to many holdings, particularly in South Korea, through the sharp sell-off that hit markets at the start of October, though he admitted he might have been “a little early” in hitting the trigger, buying as markets slid rather than at the bottom.
Throughout his portfolio, he has also been rotating away from income-producing stocks – because they could be negatively impacted by rate rises in the US – and into cyclical companies.
“The dispersion between high-quality, low-growth stocks and low-quality, high-growth stocks is now probably near record levels, or levels not seen since the Asian financial crisis,” the manager said.
Such market sentiment has presented an attractive risk-reward scenario, according to Mr Swan. He thinks economic activity could surprise positively, which will boost markets that are pricing in an excessively negative scenario.
To generate cash to invest in cyclical companies in South Korea, the manager said he had been reducing the BlackRock Asia fund’s exposure to Hong Kong and southeast Asia.
He said those regions benefited from the hunt for high-quality income inspired by low interest rates in the US, and that most companies were now looking “fully valued”.