South Korea’s stock market ended 2020 on a record high and multiple real-economy indicators are aligning to suggest a surprisingly bright 2021 for the country, its bourse and its flagship sector – tech.
None of this, however, is evident in Seoul at ground zero as Covid-19’s third-wave rolls on unchecked.
By day, shopping precinct Myeong Dong, which would normally be bustling with hordes of Chinese tourists storming branded outlets and department stores, is silent. Imdae, or “for rent,” signs have replaced retail displays in many shop windows.
By night, the city’s 24-7 entertainment districts are uncommonly silent as the neon goes out at 9:00 pm.
And at all hours, the capital’s quintessential refueling points, rest stops, meeting zones and social interaction spaces, as well as its innumerable coffee shops, are empty. Under social distancing guidelines that were extended on Saturday until January 17, all service is take-out only.
At the retail end of the economy, it would be hard to pinpoint positives. But beyond the high street, a different picture comes into focus.
The benchmark KOSPI stock market index’s record high at year-end was due less to the much-discussed divergence between capital markets and the real economy and more to current and leading indicators.
While South Korean stocks have, admittedly, benefitted from the overspill in largesse delivered by central banks in Japan and the United States, there is plenty more good news to raise your soju glass to. Annual growth, export figures, tech-sector signposts and liquidity from local and overseas suggest good times to come in 2021.
Separately, judicial and tax issues will likely shed light on the future of the vast Samsung empire.
As a result, pundits near and far like the look of South Korean tech.
“I am quite optimistic on chips, display is quite strong in the short term at least and the device market for smartphones and TV is hot,” said Daniel Kim, head of research and tech analysis at the Seoul branch of investment bank Macquarie.
“2021 should be a good year for the South Korean semiconductor companies,” said Handel Jones, the US-based CEO of International Business Strategies and an expert in the chip market. “And their longer-term positioning is good in DRAM and NAND.”
2020 was not all bad
Last year’s GDP growth figures may not look rosy by recent historical standards, but compared with other developed economies, are bright indeed.
According to the OECD’s December economic snapshot, South Korea’s GDP will contract less than any other member of the “rich nations’ club.”
Fitch, in a note sent to reporters, has revised its 2020 GDP forecast up to -0.8% from -1.1%, given the 2.1% economic rebound in the third quarter. “Incoming data … suggest that the recovery in the export-oriented sector continues unabated,” the ratings agency wrote.
“Industrial production had recovered most of the ground lost due to the pandemic in October, while the buoyancy of the manufacturing PMI in November – its highest level since 2011 – hints at further gains.”
Exports are the locomotive of the South Korean economy, and even though overseas shipments were down 5.4% in 2020, the country still managed a trade surplus of US$45.6 billion, according to a January 1 report from the Ministry of Trade, Industry and Energy.
And tech exports – notably semiconductors, the country’s top export item – were comfortably up, year-on-year, the MOTI found.
That is the top end of the economy. Traditionally Korean Inc was a two-tier beast, with chaebol (family-run conglomerates) at the top, millions of Mom ‘n Pops at the bottom and precious little in between. Now, that’s changing.
A decade after the previous administration pledged to create a “creative economy” by offering a wide spectrum of support programs and funds to get entrepreneurs on their feet, lessons have been learned, and young entrepreneurs, formerly starved of capital, can now tap fecund spigots.
Startups are booming, with 30,000 in operation nationwide. Success models are in place. As of November, G12 economy South Korea hosted the world’s joint fifth-largest unicorn flock, funded by both local and international VC.
A frothing, bubbling market
South Korean stocks have enjoyed a vintage year. On Wednesday, the last trading session of 2020, the KOSPI closed at 2,873 points. Its year-end rally marked the first time the KOSPI had breached the 2,800 mark, taking it up more than 30% from 2,189 points on 2020’s first trading session.
As confidence has returned, liquidity has poured in, with welcome investments from a new class of punter.
“If you look at retail investors, for the first time in many years there is a boom for equities among Korean individuals,” said Kim. “If you speak to young Koreans in their 20s and 30s, their interest in the market is very high and many – maybe most – are first-time participants.”
This is particularly the case as the government seeks to suppress real estate prices, South Koreans’ top investment destination. Not only is capital leaking out of property, many young Koreans may well be deciding that, as they can never afford a Seoul home, they need to park their money elsewhere.
Given that foreign investors – net sellers this year – have traditionally led Korean market trends, Kim calls the local buy-in “amazing.”
Another issue is due to the non-convertibility of the won, South Korea – despite its obvious prosperity – is still categorized by the benchmark Morgan Stanley Capital Index as an “emerging market,” the second largest after risk-heavy China.
EM investors “sell Korea first and buy Korea first,” Kim said. “If you look at Korean foreign fund flow year-to-date, it is net sell – foreign investors only started buying back in from November.”
Among the market winners are tech stocks.
According to data from Trading Economics, the stock of Samsung Electronics, which does memory and non-memory chips, devices and displays, started the year, on January 2, at 55,200 won and ended the year on Wednesday at 81.000 won, up 47.74%.
Cross-town memory rival SK hynix was at 94,700 at the start of the year and had risen to 118,500 at year’s end, a 25.13% rise. And LG Electronics, which does appliances and devices, was at 71,000 won on January 2, but ended 2020 at 135,000 won, up 90.14%.
Indeed, South Korea’s stock exchange is increasingly future-focused, with half of the top 10 stocks (Samsung Electronics, SK hynix, Samsung biologics, Naver and SK Telecom) being new economy plays – balanced out by old-school blue chips (Hyundai Motor, POSCO, Cheil Industries and KB Financial Group).
And Korean tech is winning fans. In December, financial information provider Bloomberg ran a story headlined “Fund Manager Beating 97% of Peers buys Korean Tech Stocks.” It focused on a Hong Kong-based Barings fund manager who noted that “strong earnings growth, attractive valuations and a positive trend for chip prices bode well for the country’s equities.”
The manager also noted that Korean stock is undervalued – an issue sometimes referred to as “the Korean discount.” Though some cite North Korea as the reason for the discount, many on the ground in Seoul consider corporate governance to the real risk.
“The discount is alive and well,” said Tony Michell, Seoul-based head of Euro-Asia Business Consultancy. “Korean companies do not operate in a way that encourages investors that much, and that is the reason we have a discount.”
The upside? For players with market knowledge and risk tolerance, the discount places Korean stock in attractive pricing territory.
While much punditry has focused on 2020’s markets-real economy decoupling, the Korean tech sector has been boosted by real, pandemic-related factors – notably the work-and-recreate-at-home trend.
“The key factors driving the growth in 2020 are those related to working from home such as more notebooks and also the impact of more data which has required large investments in data centers,” said Jones.
According to MOTI’s January 1 numbers, chip exports rose 5.6% year on year, for a value of $99.1 billion, in 2020. That was the second-highest chip export figure ever, after 2018’s $126.7 billion.
Outbound shipments of electronic appliances rose 0.7% on-year, rebounding from the 3.6% decrease posted in 2019. The only loser in overall tech exports was displays, which shed 12.2% due to rising Chinese competition.
According to IBS’ Jones, 2020 saw overall 5.5% growth in semiconductors. And his projections for 2021 are even rosier.
2021: Ready, set, go
The late-year 2020 buy-in by foreign investors points to a frothy H1 2021, and foreign punters’ plays are mirroring – albeit, belatedly – export trends, which have seen an acceleration from Q3 2020.
According to the MOTI’s January 1 data, exports were all downhill from March to August, but recovered in September. The year-end saw an accelerating trend with monthly exports in December advancing 12.6% on-year to reach $51.4 billion. In tech, that trend was particularly upbeat.
In the last month of last year, chip exports advanced 30% on-year for a value of $9.4 billion, or 18.4% of combined monthly exports.
With vaccine programs accelerating worldwide, 2021’s outlook is promising. The OECD predicts South Korean GDP growth in 2021 at 3%. On the markets side Macquarie’s Kim “would not be surprised” if the KOSPI “breaks the 3,500 point barrier” by the end of H1.
Global tech looks especially upbeat, and research firm Gartner anticipates global IT spending to rise 4%, on-year. And South Korea’s top export will more than double that figure. “The semiconductor market is projected to grow 8.25% in 2021,” said Jones.
South Korean players already dominate the memory space and are increasingly winning share in the less cyclical and more lucrative logic (or systems) chip market, including foundry services (ie chip OEM), now dominated by Taiwan-based TSMC.
The near-term supply-and-demand balance looks good for manufacturers.
“Korea has a dominant position in memory chips and a rising position in foundry,” said Tony Michell, the Seoul-based head of Euro-Asia Business Consultancy. “And there is a shortage of fab space looming, which will be good for stock.”
Samsung is in “a very strong position” in the DRAM market with 50% market share and the NAND market, with a 40% share,” said Jones. He anticipates that by 2030, Samsung revenues from DRAM and NAND should be the “very big number” of $170 billion.
Confessing to being “very impressed” by Samsung, Jones is upbeat on its rising non-memory positioning. It has “obtained a number of key wins in the foundry business,” while 5G chipsets are another big opportunity, he said.
Meanwhile, SK hynix “… is strengthening in DRAM and NAND and is already number two in DRAM and could become number two in NAND,” Jones said. The latter position was bolstered by SK hynix’s March acquisition of Intel’s NAND fab, although Jones reckons it “overpaid by $2 billion.”
Assessing the big two’s core businesses, Jones said: “SK Hynix is strong in manufacturing but value-added revenue from DRAM and NAND is low. Samsung is very strong in manufacturing and also in getting value-added price premiums for its DRAM and NAND.”
Regarding smaller South Korean chip firms, Jones noted that MagnaChip is “making good progress, while DBHiTek is “showing good performance in the foundry business but needs to expand manufacturing capacity.”
In sum, Jones reckons, “2021 should be a good year for the South Korean semiconductor companies and longer-term positioning is good in DRAM and NAND.”
Moving from chips to displays – a losing sector for South Korean exporters overall in 2020 – there was better news at year-end 2020, with exports up 28% to $2.1 billion, according to the MOTI.
“For displays, I am bullish on the short term but skeptical in the long term,” said Kim. “LCD panels are in very tight supply right now, because TV demand is the strongest in 10 years. If you want to buy a 32-inch monitor from LG now, some models are out of stock. Because of the lockdown economy, people are buying TVs and large-size monitors for gaming and working from home.”
That demand is causing South Korean firms to re-think mooted plant closures.
Michell noted that both Samsung and LG, focusing on higher-end display technologies such as OLED, had planned to shutter their LCD plants – but business conditions forced a rethink. “They were preparing to close down, but now there is so much demand for new TVs around the world – and if demand is high, price is high.”
Kim is upbeat for devices in 2021.
“The smartphone market is likely to grow over 10%, its strongest growth since 2012-13,” he said. Special focus is on the value-added 5G phone sector as related infrastructure comes online.
“The 5G smartphone market will more than double and the implication for that is huge, as 5G phones’ silicon content is higher than for 4G,” Kim said.
In other words, the trend will benefit chipmakers as well as device makers.
Jones agrees. He expects the unit volume of 5G smartphones to hit 517 million in 2021, compared to 223 million in 2020 and 21 million in 2019. Overall, he expects total smartphone volumes, which had declined by 12.5% in 2020, to climb by 16.7% in 2021.
That is excellent news for Samsung, which looks well-positioned by virtue both of its leading position in the premium smartphone market and also by rival Huawei’s current woes, courtesy of the US Treasury.
It is also good news for LG, though its smartphone market share is minimal compared with Samsung’s.
South Korean PCs are seeing a trend similar to that of displays. “The Korean computer industry was dying out,” said Michell. “But now, suddenly, there is this new demand and they can export.”
The China factor
While Beijing-Washington relations may well remain frosty, they are expected to thaw from the last four years. “We are past the big downside risk, which was Trump’s trade war against China,” said Michell. “Whatever Biden does won’t be as bad.”
Seoul policymakers are likely still sighing with relief. A second Donald Trump term might have forced them to make a no-win choice between strategic ally Washington and leading trade partner Beijing.
Exporters, too. A toned-down trade war pushes the specter of tech decoupling into the background.
While conventional wisdom has it that any cross-Pacific trade is disastrous for man-in-the-middle South Korea, Kim reckons Beijing-Washington animosities played to Seoul’s advantage, and will continue to.
“I personally believe that if the US keeps bashing China, it is beneficial to Korea,” he said. “Semiconductors are a good example. The Chinese semiconductor industry has no future if they don’t have US tech content and equipment. “
Kim also noted a related trend of Chinese companies being removed from overseas indices and even delisted.
“If you look at recent changes in the MSCI, some Chinese stocks were removed and the FTSE has already removed many Chinese companies,” he said. That suggests EM investors and business partners will shift to Korean firms.
And Huawei? “The negative impact from the Huawei ban is history, it has already happened,” Kim said.
Korean chipmakers may have taken some hits, though given Korean companies’ reluctance to reveal information on client sales, the amount is not known. Still, assessments are that losses of sales have not been disastrous. And Huawei’s misfortunes provide an opportunity for Korean players in chips, 5G base stations and devices.
“Huawei’s [global] market share is being taken over by other Chinese smartphone companies, and Samsung,” Kim said. “And Samsung is selling more chips to Chinese, non-Huawei smartphone companies.”
Downside risks
The biggest overall risk – albeit, one that is not specifically related to Korea, Korean stock and Korean tech – is an earlier-than-expected conclusion to the pandemic crisis and a global tapering.
“Ironically, if people manage the pandemic crisis successfully, then maybe global governments will try to recollect money out of the system. What if the liquidity dries up from central banks?” Kim asked. “Or, if the US interest rate is rising, that will be quite bad for global emerging market equities, especially Korea.”
Regarding trade as a whole, Michell suggested that the now truncated Trans-Pacific Partnership – the Japan-led multilateral trade deal – might make a comeback under globalist Biden. With both the US and even the UK possibly joining this “gold-standard” free trade agreement, intra-regional trade flows could further accelerate.
Still, there are domestic issues.
While Seoul’s Moon Jae-in administration admirably handled the virus’ first and second waves to global applause, its containment model has been less successful with the third wave.
As a result, the country has, for weeks, been hovering on the brink of the strictest social distancing restrictions, though the government has not yet pulled that trigger, citing damage to small businesses.
And elsewhere Moon’s government is not showing its most business-friendly face. “The package of policies Moon is pursuing ought to be modified and adjusted,” said Michell. “Every month, business is moving out of Korea to Vietnam and elsewhere, so Korea has to work harder to be an export nation.”
The future of Samsung
Meanwhile, the judiciary is relentlessly prosecuting an endless anti-corruption case against Samsung head Lee Jae-yong that dates back to a dubious in-house merger back to 2015 and that could land him back in jail.
The company will not necessarily suffer in Lee’s absence as it has professional managers at all levels, and so relies on Lee largely for strategy and personnel decisions.
“The stock prices of Korean companies indicate that they are sensitive to the business environment, not whether the controlling family is in jail or not,” said Park Sang-in, a chaebol watcher at the elite Seoul National University.
But if Lee goes down for longer, Samsung enters uncharted territory. “No substantial chaebol controller went to jail for a long enough period of time – they usually serve less than a year,” he said. “If Lee goes to jail for 4-5 years, it is an unknown.”
Still, 2021 will cast light on Samsung’s long-term future.
After second-generation head Lee Kun-hee died last year, it was unclear what portion of his empire his wife, Lee Jae-yong, and his two sisters had inherited. In April, when returns for inheritance tax are filed, more will become known.
That, and Lee’s legal fate, should create clarity.
“When these things all settle down, I think that will resolve uncertainty for the future of Samsung Electronics and the group in general,” said Park.