Despite recent headwinds, South Korean and Argentinian equities are set to deliver solid returns, according to Standard Life Investments (SLI), which highlighted how it aims to capitalise on their changing circumstance in research note.
SLI launched the South Korean strategy within Global Absolute Return Strategies (Gars) in April 2017, which it believes will take advantage of South Korea’s sensitivity to global growth.
Gars is a portfolio of longer-term diverse investments, 25 to 35 in number, through which the team behind it looks to exploit return opportunities across a broad range of asset classes and geographies.
The strategy, which is managed by Guy Stern and Roger Sadewsky (pictured), has recently struggled, seeing £2.8 billion outflows in the first quarter of this year and net outflows of £4.3 billion in 2016.
The reversal on its fortunes, compared to the previous 12 months, was foreshadowed by a bad start to 2016, which was only partially mitigated by gains made in the third quarter. This was also against a backdrop of gains in global equities.
The strategies continue to underperform its peer group, although performance has improved from the lows seen last summer.
Average cumulative manager performance for the 12-months until May 2017 was 4.57% for the peer group, which compared to 2.4% returned by Gars.
Looking at the opportunities in Korea, SLI said: ‘Global growth is now moving gradually upwards, sparking robust demand for Korean exports. Around 60% of the sales of Kospi 200 companies come from overseas, therefore Korea is highly sensitive to the health of the global economy.'
These companies are further supported by cost efficiencies they implemented over the past five years, the analysts argued in a research note.
‘Companies have responded to the past five lean years by controlling costs and improving productivity. This means they are particularly well-placed to benefit from improving demand, with a greater proportion of sales revenue translating into profit, SLI said.
However, SLI also identified, recent political scandal in the country, US trade policy and rising tensions with its belligerent neighbour North Korea as a possible headwinds to this strategy.
Eyes on Argentina
Meanwhile, the Argentinian strategy within Global Focused Strategies (GFS), was introduced in October 2016 and is designed to take advantage of improving political and economic policy changes in the country.
GFS, like Gars, are a portfolio of longer-term diverse investment strategies, 20-40 in number.
‘The restoration of more open and market-oriented economic policies should unlock Argentina’s growth potential,’ said SLI in the note. ‘The new government is making good progress in implementing reforms and returning Argentina to the global financial system.
‘Indeed, the benefits are already visible. The Argentine peso is stabilising, while inflation, which reached 45% in 2016, is forecast to decrease rapidly. Having contracted since 2012, export and imports are now growing. And reforms are steadily being priced into local equities.’
These indicators mean that Argentinian equities will see a ‘material improvement’ as economic activity improves, argues SLI.
The recent election of president Mauricio Macri and his market-orientated government is seen as the catalyst for this turning point.
‘We view the current period as an important and potentially historic turning point for the Argentinian economy, which would directly benefit its equity market,’ said SLI.
‘The country has enormous economic and commercial potential, with much low-hanging fruit. We seek to exploit this opportunity through one of GFS’s investment strategies, which invests in a basket of carefully selected Argentinian stocks, drawing on the combined expertise of our macro, emerging market and equity colleagues.’