Recent volatility has prompted investors to reassess the outlook for South Korea’s technology sector. Chetan Sehgal, lead Portfolio Manager of Templeton Emerging Markets Investment Trust, comments on why long-term success will depend on companies’ ability to generate sustainable returns and withstand intensifying competition from China.
The volatility experienced by South Korea’s stock market recently, with a crash and subsequent recovery, has left investors questioning the long-term viability of its associated Korean companies, and whether they can continue to generate cash for a longer period of time.
This is especially true for the tech companies which dominate the index. Among other factors, Chinese competition is intensifying, and China as a market is developing its own supply chain.
The market will continuously evaluate whether Korean companies are as resilient as they profess to be – something they will need to demonstrate quarter after quarter. The two key markers are cash return and sustainability in the face of competition from China.
Evolution in technology is happening all the time and as an investor you really have to look at the longevity of the companies in play.
That might just be a three-to-five year window for some – it may have a lot of growth associated with it, but the market and the future won’t give a multiple for that. So that’s where discernment comes into play.
While the sector’s long-term outlook remains positive – despite the volatility – we also need to pay attention to the global factors; the cost of money and the viability of financing data centres could change the outlook for the sector.
For now we remain positive in our long-term outlook for South Korea as a market and the AI supply chain sector generally, but we continue to pay close attention to developments.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: South Korea, emerging markets, mathew-schwartz-01hH6y7oZFk-unsplash
