Translation to English

“Does your investment portfolio reflect the world?”

Joonbeom Jeon for the Economy Chosun
February 8, 2021

The KOSPI has surpassed the 3,000 mark, overcoming the tall barrier of the novel coronavirus (COVID-19). Concerns are growing, however, over large sell-offs of Korean stocks by ‘big hand’ foreigners and institutions, which is inciting a pessimistic view that the fearless frenzy of retail investors may end up in a tragedy. Will the Korean stock markets continue their strong rallies in 2021? What’s the outlook for the global markets? What investment strategy can help investors limit potential losses?     

Economy Chosun tried to find the answers in a written interview with Ohad Topor, Chairman of Topor & Co Korea (TCK). The Israeli investor founded TCK in 2012 with a world-renowned investment guru, Howard Marks, co-chairman of Oaktree Capital Investment. Based in London and Seoul, TCK provides asset allocation strategies for high-net-worth individuals and corporations.   

Despite the COVID-19 pandemic, global equity markets remained heated last year. Do you see the heat will continue this year?
“The market consensus (the average view) sees the global GDP will rebound to grow over 5.2% this year after diving -3.8% in 2020. It bodes well for risky asset classes like equities. For instance, Goldman Sachs predicts that corporate profits will expand by more than 29% in 2021, with the S&P 500 companies’ returns exceeding 14.5%. Many fund managers are maximizing their equity allocations while minimizing their cash holdings, based on the bullish prospect.”

Some are worried there’s too much bubble in the markets.
“Large-scale monetary and fiscal stimulus packages have boosted valuations (share price relative to value). Not just equities, other markets, such as real estate and bonds, might have entered a late-stage bubble. Nonetheless, it’s better to stay invested, in that a late-stage bubble can still produce high returns. There’s no need to have too much fear as long as you have risk management rules in place against a potential downturn.”

It sounds too optimistic given a lot of countries are still struggling with COVID-19?
“Strong GDP recovery prospects assume successful COVID-19 vaccinations. We’re currently observing the biggest gap between the potential and the actual consumptions in 50 years. If vaccinations prove effective, the gap will rapidly narrow down, with gains in banking, commercial REITs, oil & gas, travel & leisure and other sectors. In contrast, if vaccinations turn out be disappointing, global equities could drop 10-20%, leading to a strong Dollar.”

What other potential risks are there?
“A massive outbreak or mutation of COVID-19 before countries develop a herd immunity; governments’ decision to suspend stimulus policies earlier; a rapid inflation resulting in a higher interest rate and downward pressures on the bull markets, to name a few. Biden Administration’s tax policy could influence the market atmosphere, too. Corporate tax hikes are expected to have an around 10% impact on the earnings per share of S&P companies.”

Do you think US will have a significant impact on equities this year, too?
“Certainly. US accounts for around 57% of the global equities in terms of market capitalization. It has more high-growth tech firms than any other country, with US companies posting record 14% in their net profit margins, a twofold increase from the post-Lehman low of 7%. In this sense, it seems that COVID-19 has simply delayed US companies’ profit-making, rather than significantly damaging their profitability.”

What’s your prospect of China, one of G2 nations, and its equities?
“After growing around 2% in 2020, the Chinese economy is forecast to grow over 8% this year. Chinese companies are increasing their share in the global export market, as well. They’re expected to greatly benefit from a release of the pent-up demand in the West. Moreover, the already vast domestic market keeps growing in size. Meanwhile, global portfolios have little exposure to Chinese equities, which translates to a large potential for foreign inflows- foreigners represent less than 5% in Chinese stock markets, much smaller than 15% in the US and 35% in Korea.”

What about performance of Korean equities this year?
“Korea suffered a much weaker recession than other countries last year, which led to a solid stock rally. Emerging/Asian markets including Korea are seen to maintain the upward trend along with a global GDP recovery. In 2020, foreigners withdrew 24.4 trillion won, the third largest outflows in the Korean history. If they come back this year, it’ll create a strong tailwind for the Korean stock markets. However, it’s somewhat worrisome that retail investors’ buying on margin has significantly ballooned, with the noticeably larger margin balance, especially for some of the largest companies by market cap.”

Please give us tips to be a smart investor.
“Being diversified across the globe is better than concentrating on a single country. Korea’s contribution to the global GDP is only 2% and a lot of Koreans are holding their assets mostly in the Korean won. To make money, you should incorporate global elements to your portfolio. For sure, the KOSPI has shown a strong performance these days, but it’s gone up 70% in Dollar terms over the past decade while the global equities have jumped more than 140% in the same period. In a broader perspective, the global equities have generated 9.5x returns since 1990 vs. 3x for the KOSPI. In fact, Korean investors are increasingly tapping into global markets. Koreans’ overseas stock transactions reached $195,095,560,000 (or about 211.7 trillion won) last year, which is over 4 times $40,085,000,000 (or 44.47 trillion won) in 2019. Yet, it’s a shame that the money is largely focused on a few individual stocks. They should hold a broadly diversified portfolio that includes fixed incomes, not just stocks.”

Traditionally, Koreans have preferred real estate over equities.
“I’m well aware of that. Real estate accounts for as much as 73% of a typical Korean household asset, compared to 66% in China, 36% in Japan and 24% in the US. It’s even though the Korean property bubble may burst soon as the country is facing a demographic cliff. Real estate is relatively illiquid and is subject to stricter taxation, let alone the acquisition and maintenance expenses. Thus, it can be hardly seen as comparable to equities.”

Any more messages you’d like to share?
“Pursue the simple. The more complex products are, the more likely they’ll underperform. Don’t let yourself deceived by a product that’s complicatedly structured with high fees. You should be careful that some products carry fees that are not easily visible. For long-term investors who don’t dwell on short-term losses, this may be an appropriate time to add more to your portfolio, even if some of the assets are at their highs. You may miss golden opportunities by trying to wait for a decline in equities. Generally, investors who stayed at the sideline to buy low showed a poorer performance than those who made diversified investments on a monthly basis.”