Robeco Asset Management held a briefing on the 14th in Seoul, where executives forecast that Korean stocks will face continued volatility due to high artificial intelligence (AI) exposure. Joshua Crabb, Asia Pacific Equity Head at Robeco, and Chris Berkouwer, Global Equity Portfolio Manager, stated that Korean stocks remain undervalued relative to corporate earnings despite recent volatility. The executives attributed current market turbulence to extreme price momentum and AI sector concentration, recommending portfolio diversification as the primary solution.
Robeco Identifies Undervaluation in Korean Stocks Relative to Earnings
Robeco Asset Management hosted a briefing titled 'Second Half Stock Market Outlook' at the Korea Financial Investment Education Center in Yeouido, Seoul on the 14th. Robeco is a Netherlands-headquartered global asset manager operating equity, bond, multi-asset, and sustainable investment strategies.
Joshua Crabb, Asia Pacific Equity Head, stated that Korean and Asian stocks remain undervalued relative to corporate earnings. He explained that while US stock valuations are high with limited room for further rerating, Asian stocks have seen relative valuations decline versus the US despite earnings growth. "Asia still has significant potential for rerating," Crabb said. "When evaluated over the past 45-year period, Asia is trading at very undervalued levels relative to earnings."
At the briefing, attendees noted that Korean stocks have high AI exposure but low valuations. Crabb responded that if corporate earnings do not decline sharply, the undervaluation appeal could become more prominent.
Crabb Links Korean Stock Volatility to High AI Exposure
When asked whether high volatility in Korean stocks will continue in the second half, Crabb stated, "If the market or country has a high AI weighting, high levels of volatility will be maintained." He identified the duration and intensity of the AI cycle as key variables that will determine the Korean stock market going forward.
Chris Berkouwer, Global Equity Portfolio Manager at Robeco, cited extreme price momentum as the current cause of Korean stock market volatility. "I think momentum and investor sentiment are currently formed at extreme levels," Berkouwer said. "In terms of stock prices, winners continue to rise and losers continue to fall." Berkouwer emphasized that investors should pay closer attention to whether corporate earnings forecasts turn downward rather than price momentum corrections.
Berkouwer Recommends Diversification Beyond AI and Semiconductor Sectors
Robeco advised that the response to Korean stock market volatility should be expanding investment scope to other sectors rather than reducing AI and semiconductor investments. Crabb stated, "There is a need to pay attention to areas other than AI, areas with dividend or share buyback stories. In the current situation where volatility has increased, I think diversification is needed more than ever."
He emphasized, "There are excellent companies in countries with little AI relevance or sectors with no relevance, and there are stocks showing good dividends and good profit growth. It is necessary to build such weightings in the portfolio."
Berkouwer also diagnosed that now is the right time to slightly reduce weightings in the best-performing technology stocks and find opportunities that have not yet been discovered. He said, "At the current point in time, it is the right time to gradually reduce weightings in the best-performing stocks and capture undiscovered opportunities across the market for investment."
However, Robeco clarified that portfolio diversification does not mean the AI and semiconductor industry growth phase has ended. When asked whether AI and semiconductor sectors are passing their peak, Berkouwer stated, "We see the growth trajectory and runway being maintained for several years ahead. We are saying that the valuation gap between AI and non-AI has widened too much."
Berkouwer also forecast that this AI cycle could be more prolonged than past cycles. He explained that governments are placing AI industry as a strategic priority, production capacity increases cannot meet demand growth, and long-term price contracts are extending the cycle.
Robeco Executives Discuss MSCI Developed Market Index Reclassification Impact
Regarding the possibility of Korea's inclusion in the Morgan Stanley Capital International (MSCI) Developed Markets Index, Robeco forecast that global investor preference for the Korean market will determine actual capital flows rather than index weighting changes.
When asked whether MSCI Developed Markets Index inclusion could lead to foreign capital outflows, Crabb stated, "If Korea is included in the developed index, Korea's weighting will be smaller than when it was included in the emerging markets index." However, he added, "Ultimately, what matters for capital inflows and outflows is based on what people want to invest in. Korea is a country that investors already regarded as a developed nation when looking at various indicators such as economic scale, gross domestic product (GDP), and GDP per capita."
Crabb also viewed capital movements following index changes as not a one-time event that ends at once. He stated, "When there is a change, there is gradual outflow and inflow, and it goes through a process of becoming moderate at some point. Funds holding Korea also need to adjust weightings through buying and selling processes."
FAQ
Why did Robeco forecast continued volatility for Korean stocks?
Robeco executives stated at a briefing on the 14th in Seoul that Korean stocks have high AI exposure, which will maintain high volatility levels. Joshua Crabb, Asia Pacific Equity Head, specifically said that if a market or country has a high AI weighting, high levels of volatility will be maintained. He identified the duration and intensity of the AI cycle as key variables determining the Korean stock market going forward.
What diversification strategy did Robeco recommend for Korean stock investors?
Robeco advised expanding investment scope to other sectors rather than reducing AI and semiconductor investments. Joshua Crabb stated that investors should pay attention to areas other than AI, including areas with dividend or share buyback stories. Chris Berkouwer recommended gradually reducing weightings in the best-performing technology stocks and capturing undiscovered opportunities across the market, emphasizing that excellent companies exist in sectors with little or no AI relevance that show good dividends and profit growth.
