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Reforming Korea too cheap to ignore

P2A SPECIAL THANKS FROM

KL COMMUNICATIONS

P3-4WHERE ARE THE 'BLACK

FRIDAY' BARGAINS?

P7 THE RISING APPEAL OF

ALTERNATIVE LENDING

Antipodes Partners CIO Jacob Mitchell explains why undervalued Korean equities will be boosted by reform efforts underway in the country (page 2)

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Jacob MitchellAntipodes Partners

or a long time, minority shareholders in Korea have been negatively

impacted by an unhealthy closeness between chaebol-controlled conglomerates and the government.

It has allowed the controlling shareholders of many sound companies to mismanage balance sheets and expand into areas not in the best interests of minority shareholders.

However, newly-elected officials are beginning to position themselves independently of the country's most powerful families and are implementing reform to eliminate many of the shareholder-unfriendly actions. For example, the government is looking at removing the ownership circularity evident in many conglomerates, which has allowed families to maintain a tight grip. The authorities are also seeking more progressive capital management policies, which would certainly attract more international investors.

We are bullish on the cheap Korean market and have a ~10% net long. The prospect for continued corporate governance reform heightens the appeal.

For example, despite a strong run in recent years, we are still optimistic on Samsung Electronics, which is trading on an ex-cash P/E below 8x. While the group has had to overcome recent corporate governance issues, it is continuing to improve its operational structure and is pursuing a more shareholder-friendly dividend pay-out and share buyback policy – which should not be underestimated.

It is also highly probable Hyundai Motor will be the next major chaebol to reform and restructure. Hyundai's stock is available on less than 2x pre-tax profits, once we conservatively adjust for the value of group investments and its $12bn cash pile. While the transition to electric presents long-term challenges for all automakers, we believe spinning out non-core assets, lifting dividends and buying back stock would be incredibly value-enhancing.

Aside from chaebol reform beneficiaries, KT Corporation is one of the cheapest global telecoms on several of our measures. We are also bullish on KB Financial, the leading retail banking franchise in Korea.

Reforming Korea is just too cheap

aso Legg Communications (KL) this month celebrated

its five-year anniversary.Founded by Hysni Kaso and

Jamie Legg in 2012, KL was created on the belief financial services communications could be done differently and more efficiently.

The KL team quickly expanded with the addition of partners John Kelly and Ben Robinson – both highly-regarded and experienced industry professionals.

The KL team is now 11-strong, with its proactive content-led model supporting a host of clients – including some of the world's most esteemed investment groups, such as the $948bn global asset manager T. Rowe Price.

"We are extremely proud of the development of KL over the past five years and feel very fortunate to have assembled such a professional and enthusiastic team," Legg says.

"We are extremely grateful for the trust all of our clients have placed in us over our journey – particularly our early partners – and look forward to continuing to deliver the same level of dedication and support for many more years to come.

"Finally, we would also like to thank the hundreds of journalists and other industry figures we have worked with over the past five years. The support has been overwhelming."

A special thanks from KL Comms on 5th birthday

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"Newly-elected officials are beginning to position themselves independently of the country's most powerful families"

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Rogier QuirijnsCohen & Steers

Simon FinchAshburton

Quentin FitzsimmonsT. Rowe Price

ermany, the economic gravitational centre of the

EU, is enjoying strong economic, population and job growth.

Nowhere is this more evident than in Berlin. While the public sector and tourism are playing central roles in Berlin’s revitalisation, it is quickly becoming Europe's Silicon Valley.

Although residential supply is increasing in Germany, it has not been enough to meet

ynchronised tightening among major central banks

could give developed market government bonds a volatile ride.

Navigating this uncertain environment will require a smart approach, with specific positioning on the yield curve likely to take centre stage within portfolio construction.

In addition to yield curve positioning, another way of navigating the current

ndia remains a strong domestic story, powered by

long-term structural drivers of demographics and urbanisation.

These factors lead us to primarily focus our investments in Indian-listed companies tapped into domestic demand. For example, India’s TV market has been a major beneficiary of the country’s growth in recent years and is forecast to continue expanding healthily over the next

demand, particularly in Berlin. It is estimated 20,000 new housing units are needed each year to meet new and pent-up demand in the city. However, the market has supplied only half this amount annually in recent years, which is helping to drive rents higher.

Quality office space in Berlin is also scarce. Office take-up has set records in each of the last several years, but supply has met only a quarter of this demand.

environment is to identify countries potentially less sensitive to rising rates. Australia stands out. Although its domestic bond market is likely to react to a US treasury sell-off, it should quickly revert to being driven by domestic fundamentals.

Israel also offers a potential refuge from rate volatility. With little sign of inflation, the Bank of Israel is likely to remain on hold for the foreseeable future.

few years – with subscription services yet to penetrate significantly.

We recently purchased a position in Sun TV Networks, a stock we have been closely tracking for some time. It is south India’s largest broadcaster, with more than 30 channels across four languages. The greatest opportunity for the company is the push to digital TV access in the state of Tamil Nadu.

"While residential supply is increasing in Germany, it has not been enough to meet demand"

"Specific positioning on the yield curve is likely to take centre stage within portfolio construction"

"India's TV market has been a major beneficiary of the country’s growth in recent years"

Investors outline top 'Black Friday' bargains

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Claire ShawSYZ

Phil HarrisEdenTree

Gary GreenbergHermes

e have struggled to find ideas in Spain of late,

not for a lack of interesting companies, but because the strong recovery has largely been reflected in valuations.

However, we are invested in the housing recovery in Spain and the uncertainty caused by the Catalan crisis provided an opportunity to add exposure.

Spanish housing is an attractive long-term recovery

or those of us in the West who grew up with the epithet

‘Made in China’ as shorthand for a cheap facsimile of the real thing, the concept of China as a hub of innovation is a challenging one.

However, with Chinese government funding for research ramping up and patent awards rapidly outpacing the rest of the world, the facts do not lie.

One such innovator is the

t is important to recognise the power and dominance of

consumer spending within the UK economy and the potential problems if consumer confidence takes a knock over Brexit.

However, from an investment perspective, we are finding it is not necessarily a case of ‘if’ consumers are spending, but ‘how’. Despite unemployment rates being at historic lows, wage growth in the UK is faltering.

theme and has recently become accessible via the listings of Neinor Homes and AEDAS Homes.

Housing activity contracted very sharply after the crisis, but has begun to recover over recent years. Demand is improving on the back of population growth, falling unemployment, low interest rates and better mortgage credit availability. At the same time, excess supply has been largely absorbed.

Chinese tech behemouth Alibaba. From its origins 18 years ago, it has grown to become the world’s largest retailer, while diversifying into media creation and cloud computing.

Often described as the Asian Amazon, the company’s business model also replicates that of eBay. The business is reputed to generate more gross merchandise value than eBay and Amazon combined.

It is likely people will spend less on big ticket items, such as cars or furniture, and switch focus to the little luxuries in life – going out for coffee or ordering a takeaway.

This is why we are attracted to a company like Hotel Chocolat. Consumers are allocating rationally into the things they can afford to improve their quality of life – while deferring larger spends for better times.

"Uncertainty caused by the Catalan crisis offered an opportunity to add housing exposure"

"From its origins 18 years ago, Alibaba has grown to become the world’s largest retailer"

"Despite unemployment rates being at historic lows, wage growth in the UK is faltering"

Investors outline top 'Black Friday' bargains

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Josh SpencerT. Rowe Price

he internet has already had an enormous negative impact on

brick-and-mortar businesses, but some investors are convinced traditional competitors will soon turn back the tide through investments in e-commerce.

However, this view fails to appreciate the rapid rate and magnitude of disruption in these industries, particularly in retail.

Retail disruption is being driven not only by the increasing use of online transactions, but also by the impressive scale, innovation and data leading platform companies can deploy – as well as the ability to capitalise on new behavioural trends.

Scale for platform technology companies helps create more centralised distribution operations and keeps fixed costs low, while still providing customers with a vast selection – which would create significant inventory problems if offered in physical stores. This structure

contributes to lower relative prices and increased flexibility to meet market changes.

Conversely, traditional retailers are often buried under high fixed costs, like real estate and dated distribution channels. This limits the ability to adapt, frequently resulting in missed opportunities to increase productivity or to enter new markets. While traditional retailers invested in offline scale by building and refurbishing stores, e-commerce competitors continued to invest in online platforms and improve customer service.

The transition from offline-to-online is still in the early stages and we continue to look at companies striving to become platforms to enable new markets to move online. Companies creating an efficient, consumer-friendly online experience – especially those seamlessly integrating a website and social media presence with the in-store experience – deserve a close look.

Forces of tech disruption in retail

euberger Berman Investment Management

(Shanghai) Limited, Neuberger Berman's wholly foreign-owned enterprise in China, has secured registration as a private fund manager with the Asset Management Association of China.

The registration allows Neuberger Berman to manage private funds and raise assets directly from qualified investors in mainland China.

Neuberger Berman manages portfolios for various leading Chinese institutional and intermediary customers – across equities, fixed income and private equity. Earlier this year it added experienced local equity manager Bin Yu and team, while also expanding equity research for global and EM managers investing in China.

In addition, Peter Ru joined the team in Shanghai as a senior portfolio manager, with key responsibility for further developing the group's China fixed income capabilities.

"This is a very important milestone and we are delighted to be one of the first firms to secure this licence," Patrick Liu, Neuberger Berman's head of China, says. "We are committed to building a leading investment management firm in China, offering our customised product solutions in equities, fixed income, multi-asset, quantitative investing and alternatives."

Neuberger obtains China private fund manager licence

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"The transition from offline-to-online is still in the early stages"

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Craig VeyseySanlam FOUR

Jonathan PinesHermes

he Bank of England earlier this month raised interest rates by 0.25% to 0.5%,

the first hike for the UK central bank in more than a decade.

While some of the Bank of England Monetary Policy Committee members – even among the most dovish – have been talking up more than one hike, we do not think the committee will be in a rush.

The authorities will likely want to see the impact on consumers and households with variable rate mortgages.

We would expect a pause until this coming May, at the earliest. The Bank of England will likely tread a similar path as the Federal Reserve the first time it hiked interest rates. While the Federal Reserve initially indicated

o the casual observer, the emerging Asia region has witnessed a powerful

return to investor favour over the past three years.

However, beneath the surface of the broad market's strong overall return of 33% over this period are some significant performance disparities – most notably across the capitalisation spectrum. The ten largest stocks in the region have seen an 88% share price spike, far exceeding the 16% rise for mid-caps and 11% rise for small caps.

While the sharp rise of some mega-cap stocks, such as Alibaba, is justified by fundamentals – the broader outperformance of this segment of stocks, and even more particularly the underperformance of the mid-cap

it wanted to do more, it was cautious and only raised rates again one year later.

We do not believe the most dovish members of the MPC have fully embraced more rate hikes just yet; particularly as the UK still faces serious concerns, such as Brexit.

Nevertheless, these uncertainties will likely result in more bond and currency market volatility – which will create opportunities for investors.

As for gilts, the concerns about the UK economy will likely cap government bond yields. It is worth remembering that we have become accustomed to low rates. If sterling rises on the expectation of rate increases, it will dampen inflation and mean there is less of a need to continue hiking rates.

segment, has been powered in part by a substantial net flow of passive investment into the region.

Although the passive impact has challenged active investors in Asian equities recently, it also offers opportunities. While passive flows can influence markets in the short term, they cannot in the long term.

Ultimately, price discovery relies on active managers who will eventually buy what is cheap and sell what is expensive. To quote value investing luminary Benjamin Graham, 'in the short run, the market is a voting machine but in the long run it is a weighing machine'.

In the end, the intrinsic value of the company behind each stock must determine its price.

Expect pause after hike

Distortions within Asia

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Nordea unveils European Stars Equity Fund

"We do not think the Bank of England will be in a rush"

"Ultimately, price discovery relies on active managers"

ordea Asset Management, the leading

investment manager in the Nordic region with €217bn of assets under management, has expanded its family of ESG-focused 'Stars' strategies.

The new Nordea 1 - European Stars Equity Fund is managed by Nordea's Fundamental Equities team, namely Kasper Elmgreen, Thomas Sorensen and Henning Padberg – in collaboration with Nordea's Responsible Investments team.

Sorensen and Padberg are the lead managers of the group's highly-regarded Nordea 1 - Global Climate and Environment Fund.

Like all members of the popular Stars family, the new Nordea 1 - European Stars Equity Fund invests exclusively in companies meeting international ESG standards – environmental and social criteria, as well as criteria of good governance. The strategy invests at least three quarters of its assets in companies headquartered, or carrying out primary activities, in Europe.

"With its focus on Europe, the European Stars Equity strategy ideally complements the existing Stars products – which invest in emerging markets, global equities, Swedish and Nordic stocks, as well as Swedish bonds," Christoph Girondel, global head of institutional and wholesale distribution at Nordea AM, says.

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T: +44 (0) 203 137 7823www.kl-communications.cominfo@kl-communications.com

Stewart CazierThinCats

s cash held at the bank is being slowly eroded by inflation, many investors

have been attracted to the returns offered by the alternative – namely 'peer-to-peer' – lending space.

However, any investment where capital is at risk – such as alternative lending – is not covered by the FSCS and should not be considered as a substitute for cash deposits. So, why should investors look at the burgeoning alternative lending sector? We believe there are three key reasons.

Firstly, 'diversification' is often referred to as the only free lunch in investing. This essentially means investors should hold a variety of assets with different underlying risk drivers to ensure an entire portfolio is not dramatically derailed by a single factor or event.

Alternative lending is very interesting from this perspective, as it is one of the few income options that may be shielded from volatility. This has grown in importance as many assets trade at historically high valuations.

Institutional investors understand this, which is one of the reasons why alternative assets are popular with this segment of the marketplace – in areas such as infrastructure projects, like toll roads or power generation. These alternatives can provide a steady return and the values are not directly dependent on the supply and

demand dynamic. Unfortunately, it can be difficult for many investors to directly access these. Fortunately, alternative lending offers similar characteristics. It could be one of the few ways investors can diversify away from everyday volatility and risk.

Secondly, income-seeking investors often have long-term predictable needs in mind when choosing investments – such as retirement income. Traditionally, investors have held a portfolio consisting of equities and bonds, alongside some cash.

The problem here is that many investors rely on gradually selling assets, in addition to the income generated, to meet long-term income needs. A major market dip is not necessarily a problem when accumulating long-term savings, as holdings generally recover over time. However, those investors obliged to sell in

Appeal of alternative lending

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a market downturn will forever lose the opportunity to recover the lost capital. Alternative lending may avoid this pitfall as investors may fund income needs from regular repayments from borrowers, and so may not need to sell assets in market dips.

Lastly, alternative lending can offer attractive returns relative to other options, as well as against cash. Funding Circle has seen average returns of 6.6%, while ThinCats has delivered 7%-8.5%. Even if you are not an income investor, alternative lending could make a valuable contribution to a diversified portfolio during the accumulation of wealth phase.

Of course, there is the potential of illiquidity in alternative lending – so it is important investors are confident the money allocated will not unexpectedly be required before it is due to be repaid.

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"Alternative lending is one of the few income options that may be shielded from volatility"