Translation to English
“Foreigners will continue to sell Korean assets. Prepare for the secondary effect that is coming soon”
Hyun-sook Cho for Joongang Ilbo
March 31, 2020
Ohad Topor, CEO of TCK Investments, warned that the real crisis has not yet begun in an email interview,on March 30. Mr. Toporsaid that the secondary impact caused byCOVID-19 would come soon so that the damage on businesseswill spread beyond the front line industriesto the rear industry.
Mr. Topor is an Israeli investor and entrepreneur. He is the founder of TCK Investments which he co-founded with Howard Marks ofOaktree Capital. The followingisa Q&A with Mr. Topor.
Q: The market seems to have stabilized for a while as major economies such as the United States and Europe have implemented large-scale stimulus packages and a zero interest rate policy. But the bottom is still invisible.
Korea has been experiencing the full effect of COVID-19 for over 2 months. In the US and EU, it is just beginning. The effects on businesses, in particular the suppliers to these businesses, constitute what I call the second layer effect. This has not even started yet because most countries are still trying to grapple with the depth of the immediate damage.
Layoffs and unemployment are just beginning to show. The secondary layer effect will be on suppliers. Further signs of the secondary effects will include bankruptcies and liquidity issues. More unpleasant news is expected in the form of failures of known names and brands all around the world. Eventually, these will then be further reflected in the financial markets.
Q: How would you compare this COVID-19 outbreak to the Lehman crisis in the past?
People and businesses have shut down activity and as you may have already heard, it is simply put –comparable to war-time. This is what makes it different in terms of the type of crisis and how severe it can be. If this continues for several months, it will be the steepest drop in GDP activity in recent history. Currently, financial markets have priced in about 6 months forward activity such as the drop in GDP, likely because that is as far as our visibility will allow us to see. It would seem necessary to prepare for even the worst. there are six factors that global investors are looking at closely and currently only one of these factors is blinking green.
(moving graphic of 6 parameters)
Q: Korea was criticized for its rapid spread of COVID-19 in the early days, but this perception has changed as it has spread rapidly in other countries such as Europe and the United States. Nevertheless, as the outflow of funds in Korea has accelerated, the stock markets sharply fall compared to other countries.
The pricing of assets has nothing to do with how impressively the country has dealt with the virus. It has to do with how panicked investors are on a global level, as money moves around the world in search of safe havens. Korea is a market that is heavily influenced by the world.
Q: What effect will all this have on Korea?
In the Lehman crisis, foreign investors took out USD50billion from Korean stocks. This and the GFC crises are similar to a certain degree: 1) both crises have very rapid declines in consumption which will affect exporting countries much more than non-exporting countries, 2) exporting countries will have their supply chains disrupted so countries like Korea will be hit hard, and 3) If this happens, Korea will be affected in terms of currency and assets because when investors that move big amounts of money around the world (such as developed market savings and pension investors) become concerned as the crisis unfolds, they will sellmore assets that are considered high-risk. Those assets include Korean stocks and bonds. We already saw this last week and this week. The possibility of investors continuing tosell Korean assetsremains large.
Q: Risk aversion at extreme levels is taking place in financial markets around the world. With US Treasury bonds and gold prices falling, only the U.S. dollar is skyrocketing. Do you think this phenomenon will continue?
Yes. During the Lehman crisis, the KOSPI went down 72% in dollar terms from thepeak to the bottom. This combines not only the drop in the index but also the devaluation of the Korean won relative to the dollar. During this one year one month period, the KOSPI actually had several small rallies, each rising about 10, 20, 30% in dollar terms. If we think that the situation is comparable to the Lehman crisis, and we believe that we are at the beginning of something big, then I think we will see the US dollar continue to be the strongest safe haven currency to a large degree because of US treasuries. If we believe that we are actually at the beginning of something big, it is likely that we will see the US dollar -and Treasuries and gold -continue to be strong relative to the Korean won and the Kospi.
Q: As the stock market around the world recently plunged, there is growing concern that ELS investment losses will be huge. What are your thoughts on this matter?
The huge success of ELS products is a phenomenon that is particular to Korea. Global investors with a long-term view tend to shy away from similar products, particularly since the 2008 global financial crisis. Investors consider them opaque, expensive (considering the risk/reward trade-off because during crises they tend to show disproportional declines), oversold (because the underlying assets are usually the “fad of the day”), and are not managed with a buy-and-hold philosophy.What is concerning is that financial institutions (securities firm, banks) that issued and sold ELS products along with ELT and ELF are under considerable strain because they sold products that undermined the trust of customers in the financial system to provide sound products. With deterioration in customer trust and balance sheet health, the financial system would be placed under additional stress as they would want to shy away from playing their central role as enablers of fiscal and monetary policies such as issuing loans and protecting companies.
Q: What investment strategy should we choose in an unusual situation that we have never experienced before, called COVID-19?
For those who need immediate living expenses, the only answer is to hang on to cash or short term bonds. If you are one of those fortunate enough to sustain everyday life with a sufficient amount of excess cash, the crisis ahead, if deep enough could present a once-in-a-lifetime opportunity to buy assets at cheap prices. In addition, there are companies that will benefit from this virus situation. Technology companies related to work-from-home and remote-access, as well as companies related to stay-at-home economies stand to benefit. We will see a cultural and behavioral change after this crisis. More companies will feel comfortable with having their employees work from home. We can expect to see a rapid increase in demand for related products.
Q: You warned that the Korean industry is facing a crisis. Is there any chance to break it?
There is also a golden time to invest in the future. This virus situation has highlighted the Korean healthcare system andinfrastructure –Korea is coming out as a champion in dealing with this virus. Looking forward to the end of the COVID-19 outbreak, I think it is an important time for the government's active efforts to foster new growth industries such as new materials, telecommunication infrastructure, bio, healthcare, smart cities. This will improve the employment rate in a short period. I really hope that individuals can use this opportunity to make themselves stronger by investing smartly; if the average Korean on thestreet does well by investing smartly, that’s great for the country.
Q: Asset allocation of Korean is still skewed heavily towards real estate assets.
The risk in real estate is illiquidity. Real estate has a misleading attribute that makes is seem steady but if you wanted to go out and sell your property like you would sell your shares in Coca Cola, the discount that you would have to pay to sell your real estate today would be
huge. As of March 25, the Korean won has lost 8.1% (ytd) versus the dollar. From a global investor’s perspective, if I had invested in Korean real estate and the price did not go up, then I have lost 8.1% on my investment because of the currency.If the secondary layer effectmentioned above appears in any case, the real estate market may face a bigger crisis. We will really begin to see how difficult it is going to be to sell real estate at a good price.
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Ohad Topor holds a Masters in Business (MBA) from Stanford University Graduate School of Business and B.A in Economics from Tel Aviv University in Israel. He is the founder of TCK Investments which he co-founded with Howard Marks of Oaktree Capital. He is the CEO and Chief Investment Officer of TCK Investments which is a global investment management company based in Seoul and London. The main clients of TCK are HNWIs and corporations.