Author: mcpadmin

On 26 February 2024, South Korea’s Financial Services Commission (FSC) together with the Korean Exchange (KRX) announced the country’s Corporate Value Up Programme. Similar to, and most likely inspired by, Japan’s decade-long initiative, the aim is to raise valuations and boost shareholder returns. This is a move to address the so-called ‘Korea discount’ where listed companies tend to have lower valuations compared than their global peers. In fact, over two thirds of listed companies on the Kospi have a price-to-book (P/B) ratio of less than 1¹.

Source: Bloomberg

A significant contributor to the Korea discount is weak corporate governance standards, particularly within the notorious chaebols – wealthy and influential family-owned conglomerates like Samsung, Hyundai Motor and LG. Chaebols have traditionally prioritised maintaining control over maximising shareholder value and including minority shareholders in active participation. One notable example is the deliberate suppression of company value to minimise the blow to the next generation when it comes to paying the hefty 50-60% inheritance tax. However, it’s important to recognise that while chaebols play a crucial role, there are other factors contributing to the discount, including traditionally low dividend payouts and inefficient asset utilisation among Korean companies.

The Corporate Value Up Programme is a set of voluntary guidelines encouraging companies to devise mid- to long- term plans and targets to increase shareholder value, with board members playing a key role in the implementation. Companies are encouraged to disclose these plans annually on the KRX website. Korean financial regulators have emphasised that there are significant financial incentives for companies to participate in the programme, claiming that the incentives will exceed those offered by Japan in its equivalent initiative. In addition, best practice companies (those with a proven track record of profitability or those that are expected to boost valuation) will be included in the upcoming Korea Value-up Index, the other major pillar of Korea’s efforts.

The Korea Value-Up Index, to be introduced in June, mirrors Japan’s JPX Prime 150 Index by including companies that are making efforts to improve their valuation. The purpose of the index is to create a market environment that promotes investments in such companies, makes them more accessible to retail investors and enhances market transparency. Pension funds and institutional investors will use the index as a benchmark, and ETFs tracking the index are expected to be launched by December. Evaluations of key financial indicators, including P/B ratio, price-to-earnings ratio and return on equity will be part of the index’s criteria. These indicators, along with dividend payouts, will be regularly published on the KRX website.

Concerns have been raised about the lack of detail in Korea’s Value Up Initiative, particularly regarding the unspecified tax incentives the FSC places great emphasis on. Another source of disappointment is the voluntary nature of the programme; without enforcement companies may not take decisive action to improve valuations, rendering the initiative meaningless. As a result, the Kospi Index fell by 0.8% on the day of the announcement².

The FSC has responded to such criticism by stating that is it more realistic to provide powerful incentives than to enforce cooperation, and that final guidelines will be announced in June. The FSC has also stressed the importance taking a long-term view. Chairman Kin Joo-hyun stated that “enhancing the corporate value of a company is not something that can be achieved in a short period of time with only one or two measures.”

A look at Japan may help to better understand Korea and its initiative. Japan has faced similar challenges of low valuations and shareholder returns since its market crash in 1987. As a result, the country embarked on a corporate governance mission over a decade ago. Efforts ramped up last year when the Tokyo Stock Exchange (TSE) announced in March that listed companies with a P/B ratio of less than one must submit a plan to improve capital efficiency. In October, the TSE announced its ‘name and shame’ measure whereby from January 2024 it will publish a list of companies with poor shareholder returns that have disclosed these plans, thus indirectly calling out companies that haven’t. These efforts are finally bearing fruit as the Nikkei 225 hit a 34-year high on 22^nd Feb closing above 39,000 points³. Many investors are putting Japan back on the agenda in 2024 after a 34-year hiatus.

So, what lessons can Korea learn from Japan? While Korea’s initiative may result in little change in the short-term, due to its unspecified and voluntary nature, it should not be deemed insignificant. Given that Japan’s reforms took over a decade to take effect, Korea’s equivalent reforms should not be expected to happen overnight but should be considered an important starting point for long-term improvements.

¹ Bloomberg

² Bloomberg

³ Bloomberg

As China enters a new year it is fitting to draw a comparison with this year’s zodiac animal, the dragon. Undoubtedly, the Chinese economy could do with a bit of luck and strength, attributes associated with the dragon. However, the key question remains: will the market heat up or will investors just get burnt?

Rewind one year and investors were projecting a strong recovery in China given a long-awaited farewell to its zero-Covid policy. This optimism was short lived. The rally in China’s stock market quickly tailed off as structural problems became alarmingly apparent. Deep-seated problems in the property sector, with defaults by major developers led by property giant Evergrande, had a knock-on effect on domestic lenders. FDI flows, domestic manufacturing, exports and consumer spending all remained weak, exacerbating China’s deflationary cycle. Such issues left Chinese equities trading at record lows.

However, a closer look at key metrics could indicate a disconnect between market sentiment and the reality on the ground. Box office sales increased in 2023, domestic tourism is booming with planned travel expenditures for 2024 surpassing 2019 figures, and car sales are reaching unprecedented highs. These are all important signals for a potential rebound in consumer spending this year.

Furthermore, the Chinese government has initiated measures to strengthen domestic demand, support the stock market and shift away from an over-reliance on infrastructure and real estate investment. A recent measure by Beijing to mitigate selloffs in the market and promote stability comes in the form of increased purchases of onshore Chinese stock market ETFs by state and sovereign wealth funds.

While measures so far have fallen short of substantial fiscal interventions many investors hoped for, the cumulative impact of the government’s smaller-scale initiatives should not be ignored. Furthermore, China’s upcoming National People’s Congress (NPC) session on 4-5 March is a key annual meeting where economic and social development plans for the year will be unveiled. Analysts expect a GDP growth target of 5% and the announcement of further measures to boost growth, support demand and improve the business environment.

So, given China’s attractive valuations, improving consumer sentiment and increasing fiscal support, why do we continue to invest cautiously in China?

First of all, despite some positive signs, structural challenges remain. 70% of household wealth is tied up in property, and the crisis is by no means over. Property investment and new construction dropped 9.6% and 20.4% respectively in 2023¹. Furthermore, Evergrande’s liquidation order in January and the liquidation petition filed against Country Garden on 28^th February are exacerbating the lack of confidence in the property sector. This may lead to an extended period of cautious consumer spending.

Additionally, the CCP’s intervention in the economy, coupled with lower corporate governance standards among Chinese companies compared to their Asian EM counterparts, continue to steer us away from direct investment in China. The CCP’s near destruction of the EdTech sector in 2021 is a prime example of the regulatory risks inherent in the country.

Finally, when it comes to companies, we rarely find the level of governance, fundamental quality and innovation that would meet our investment criteria. Instead, we prefer to access the Chinese market indirectly through countries such as Taiwan and South Korea which also benefit from improving consumer sentiment in China. For example, our portfolio includes Elite Material, a Taiwanese company specialising in components for the semiconductor industry. It operates manufacturing facilities across China and generates a significant proportion of its revenues in the country while offering Taiwanese standards of governance and transparency.

No investor can afford to ignore the world’s second largest economy and China is still forecast to grow by 4.6% in 2024², much faster than any developed market economy and many of its emerging market peers. So, we continue to scour the Chinese market for exciting companies that meet our quality investment criteria.

¹ National Bureau of Statistics of China

² IMF World Economic Outlook Growth Projections, January 2024

As we reflect on a volatile year 2023, we are reminded of the words of Winston Churchill: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

The year unfolded with global fears of inflation, coupled with concerns over the ongoing conflict in Ukraine and uncertainties surrounding the US and European economies. A sluggish recovery in China and unsettling events, such as the terrorist attacks in Israel and the ensuing conflict added layers of complexity and prompted cautious positioning by investors.

Since our launch in 2018, MCP has weathered a pandemic, geopolitical turbulence and economic shocks. Our strategic choices, based on a rigorous focus on quality, careful selection of management teams and business models, and a vigilant awareness of macroeconomic and company-specific risks, have steered us through these turbulent waters. We avoided investing in Russia and had almost no direct exposure to China. By taking advantage of the opportunities presented by market conditions, the Mobius Emerging Markets Fund (MEMF) has generated sustainable long-term returns, culminating in a five-year track record of significant outperformance, with return of 26.9% (Private C USD Founder, as of 29 September 2023) since inception compared with the MSCI EM USD Index return of -8.6%. In the current year alone, MEMF has outperformed the MSCI EM Index by an impressive 10% (as of 29 December 2023).

One of the exciting companies that have contributed to our success is Classys. Founded as a family business in Seoul in 2007, Classys is the global market leader (ex-US) in non-invasive medical aesthetic devices with a 30% market share. Its cutting-edge devices use high-intensity focused ultrasound (HIFU) and radio frequency (RF). Classys’ “razor and blade” business model, which sells both medical devices and cartridges, has led to continuous gross margin improvements. Although the company is already present in 70 countries, its expansion into the US and China offers immense growth opportunities. In the third quarter of 2023, Classys again reported robust results, driven by product innovation and geographic expansion, and has provided positive guidance for FY24.

This positive momentum is not limited to Classys; it is evident across our portfolio. In particular, our technology holdings are seeing inventories normalise and demand pick up. Our quality portfolio companies have demonstrated resilience and adaptability, and as business and consumer spending continues to improve, our companies will benefit from the recovery. Although developed markets outperformed emerging markets in2023, low valuations, a potentially weaker USD and expected higher growth suggest a positive outlook for emerging markets in 2024.

We recently announced Mark Mobius’ well-deserved retirement from Mobius Capital Partners. We would like to express our gratitude for his mentorship, leadership, and the remarkable energy and passion he brought not only to the business but also to our lives. The firm and its vehicles continue seamlessly under Carlos Hardenberg’s leadership, supported by our exceptional team of passionate and dedicated analysts. We are committed to continuing to deliver superior long-term returns over the next decade.

We thank you for your continued trust and support. As we embark on the exciting path ahead, we wish you a happy and prosperous New Year. Thank you for being an integral part of our journey.

The Mobius Capital Partners Team