Templeton Asset Management Ltd's Mark Mobius is betting corporate governance improvements in South Korea and political stability in Taiwan will help drive stock prices in those markets higher.
The 68-year-old, who oversees US$17 billion of investments as head of Templeton's emerging markets funds, said he's also favoring South Korean and Taiwan stocks because he's optimistic of a recovery in the computer-related industry. The two economies count electronics as their main exports.
Those factors will help South Korea and Taiwan's equity markets narrow the valuation gap with developed markets, he said.
South Korea's Kospi trades at 10.9 times estimate earnings.
Taiwan's TAIEX is valued at 16.2 times. Japan's Nikkei 225 Share Average trades at 22 times.
"The so-called Korea discount is going to disappear and that's what we're counting on," said Mobius. In Taiwan, "the situation with China is going to get better."
Almost 30 percent of Mobius' US$328 million Emerging Markets Fund was invested in South Korean and Taiwan equities. The fund rose 12 percent this year, compared with a 7.3 percent advance in the MSCI Emerging Markets Index.
Activism by investors such as Sovereign Asset Management Ltd in South Korea will encourage companies there to improve their business practices, Mobius said.
Monaco-based Sovereign has been locked in a two-year battle to oust Chey Tae-won, SK Corp's chairman, because he has been convicted for accounting offences. Sovereign has also urged the management to stop using SK Corp to prop up ailing affiliates.
SK Corp, the country's biggest oil refiner, climbed more than six-fold since Sovereign started buying shares in March 2003.
Sovereign cited better corporate governance at LG Group companies, such as reduce cross-shareholdings, as the reason for buying stakes in LG Electronics Inc and LG Corp this year.
More transparency and better disclosure will help boost the shares of companies such as Samsung Electronics Co, Mobius said.
The company, South Korea's largest electronics maker, is among the top 10 holdings of Mobius' Emerging Markets Fund.
"With the work that Sovereign is doing with SK and now LG, you're going to see a much more salient attitude towards corporate governance in South Korea," Mobius said. Samsung Electronics, "if it were in New York, would be worth 20 times what it is."
In Taiwan, stocks stand to gain from a thawing of relations with China. Signs have been emerging of closer relations.
Taiwan is close to allowing Chinese financial institutions to set up offices on the island, Kong Jaw-sheng (龔照勝), chairman of Taiwan's Financial Supervisory Commission, said on Feb. 23.
Taiwan businesses have invested US$100 billion in China, where an estimated one million Taiwanese live and work.
The TAIEX gained 11 percent in US dollar terms last year, making it the 10th-worst performing of 60 major stock indexes tracked by Bloomberg. It's up 1.1 percent in local dollar terms this year.
"You have the local investors not in the market and not too happy about what's going on mainly because of the political situation," Mobius said. "That's changing."
Computer-related shares, the second-worst performing of 10 industry groups on MSCI's Asian benchmark, rallied the past month. They're now the third-best performing industry group amid optimism of a recovery in demand for technology products.