One of my early conversations in Asia with a large Korean institutional investor highlighted the influence that exchange rates and domestic economic conditions have on asset allocation when such institutions consider diversifying their portfolio and investing internationally.
The investor explained why the institution had not yet considered investing overseas. A strongly appreciating currency that reduced the attractiveness of any international allocation and a strongly performing domestic stock market rendered any offshore allocation inferior. In his words: “Why should I invest overseas when I have the best-performing asset class here in Korea with no currency risk?”
Indeed, in the several years after the Korean stock market liberalised in the early 1990s, and at a time when international investors were building positions in the Korean stock market enthusiastically, it was difficult to present a compelling case for Koreans to invest overseas. By the late 1990s those Korean institutions that had eventually allocated internationally quickly repatriated the money during the Asian financial crisis. That difficult period, followed by the bursting of the global tech bubble a few years later, put any future plans to develop international investment strategies on hold for many Korean institutions.