Two weeks after joint U.S.-South Korean military maneuvers took place off the Korean Peninsula, South Korea has been unusually vigilant watching for retaliatory action from its northern neighbor. Tensions between the North and South have continued unabated since their civil war ended in a cease-fire 57 years ago. Although the ongoing turbulence with North Korea is what South Korea is mainly known for, I believe this nation of roughly 50 million people should also be acknowledged for its vibrant economy and investment opportunities.
Recently, the International Monetary Fund increased its 2010 growth forecast for South Korea to 5.75 percent from 4.5 percent as a result of the recovery in global trade and a successful Korean government led stimulus. Additionally, South Korea has many structural assets which give it a competitive advantage over other countries in both the developed and developing world. These assets will continue to fuel the growth and development of South Korea for decades to come.
Primarily, South Korea has an extremely well educated workforce. According to the article “South Korea's education success” from BBC News,“ Young people in South Korea's workforce are more likely to have achieved an upper secondary education than anywhere else in the developed world.” The education possessed by this generation of South Koreans will play a large role in South Korea’s push to become an economic powerhouse. Economic and corporate gains should follow from the influx of educated workers.
Additionally, South Korea has a strong economic partnership with China, which has only strengthened over the last decade. As China’s citizens become more affluent, their demand for South Korean goods such as Samsung LCD televisions and Hyundai vehicles will increase with their incomes. In fact, according to the article “Korea’s Stocks, Asia’s Second-Cheapest, May Rise, Oberweis Says” from Bloomberg BusinessWeek, “China now accounts for about 25 percent of South Korea’s exports, up from 14.6 percent in 2002. The U.S., who used to be South Korea’s largest export market until 2002, is now buying about 11 percent of the nation’s exports.” South Korea is greatly benefiting from exporting more to China, the second largest economy in the world. This trend seems likely to continue as China grows and demands more South Korean goods.
The South Korean economy is currently enjoying pronounced growth and is positioning itself to become an economic player on the Asian continent. Asia’s fourth largest economy is one of the highest yielding, but at the same time, conservative investments in the emerging world. As a result of the strong economic outlook in both the short and long terms, I would recommend being long securities that have exposure to South Korea.
Although there aren’t many South Korean companies listed on exchanges in the United States or European Union, investors can still take part in South Korea’s economic rise through the iShares ETF South Korean Index Fund (EWY). This exchange-traded fund holds shares in roughly 100 of South Korea’s largest companies.
Like most ETFs, it carries a small expense ratio and gives investors a relatively diverse exposure to all South Korean industries. The largest holding of the ten year old fund is the electronics powerhouse, Samsung, comprising 18 percent of its assets.
Moreover, information technology companies and financials are the fund’s two largest holdings, with around 30 percent and 16.5 percent respectively. These two sectors should appreciate more than any other in the South Korean economy. As South Korea’s economy continues to grow, the demand for information technology and financing, essentials for any modern company or economy, will only increase.
The South Korean economy is a model for innovation and economic growth. As a result, I recommend being long the iShares ETF South Korean Index Fund to take advantage of the growth in earnings that the underlying companies will provide going forward.
Disclosure: No positions