Mobius: South Korea ‘chaebol’ system at risk after Park impeachment

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The impeachment of South Korean President Park Geun-hye could lead to a weakening of the ‘chaebol’ system, whereby conglomerates pass on control from father to son, regardless of the family’s stake in the business.

Franklin Templeton’s Mark Mobius says last week’s rule by the constitutional court to uphold the parliament’s impeachment of the president has important implications for the South Korea market and economy – and beyond.

Mobius, the executive chairman at Templeton Emerging Markets Group wrote in a recent blog that he was not surprised over the outcome.

He says: “South Koreans have been particularly harsh when it comes to presidential corruption and abuses of power.

“Several South Korean presidents in the not-so-distant past have been jailed or gone into exile—one was even driven to suicide.”

He explains the country’s strong Confucian traditions have historically made it difficult to confront people of higher status, but he notes this is starting to change.

Mobius warns the system of chaebols “could be reformed or dismantled as a result of the recent presidential corruption scandal.”

He adds: “Since the major chaebols are so important within the South Korean stock market, moves to reform the system could have major implications for the market.

“A weakening of the chaebol system could give an opportunity for smaller companies to grow and prosper without being dependent on the chaebols.”

As such, and taking a bottom-up approach, Mobius does not anticipate any impact to his team’s portfolio, he could place a greater focus on small and medium sized companies should the chaebol system start to crack.

Meanwhile, the manager of the Nodea 1 Emerging Stars Equity fund says Korea is due a re-rating, from which patient investors could benefit.

Jorry Rask Nøddekær says: “Korea has come a long way, but there are still some skeletons in the closet.

“This is the reason why Korea trades at such a massive discount. It is not because Korean companies cannot make money; it is because you never really know what goes on behind the scenes.”

But the lack of transparency and legacy issues are improving and the country is “getting closer to the finishing line”.

He adds: “If it continues, the potential unlocking of value is massive. We could get this re-rating in six months, or it could be 36 months away.

“Nevertheless, our belief is you should stay in Korea and hang in there for this re-rating.”

Mobius adds: “What’s happening in South Korea offers some broader potential implications, particularly for other countries with problems of corruption in the political arena.

“For example, prosecutors in Brazil took inspiration from Italian prosecutors who had been successful jailing corrupt politicians.

“While these scandals are unsettling and can create market volatility, they also offer opportunity for positive change.”