We have all witnessed the enormous coverage given to China’s meteoric rise, and the country has been attracting more investors than any other region in Asia as a result. But for investors not willing to walk the monkey-see-monkey-do China way, South Korea deserves equal attention if not more, offering under-rated values and long-term economic stability.
While the US economy was bleeding last year, South Korea adopted numerous economic reforms in early 2009 amid the global financial crisis, including greater openness to foreign investment and imports and has witnessed a remarkable change in its fortunes compared to last year. South Korea’s central bank has painted a bright optimistic future for the country as well anticipating exports to grow by 11.9%, private spending to jump by 4%, capital investment to soar by 13.4% and inflation to be a mere 2.6% for the year.
- International Monetary Fund increased its 2010 growth forecast for South Korea to 5.75% from 4.5% as a result of the recovery in global trade and a successful Korean government led stimulus
- South Korea has a strong economic partnership with China, which has strengthened enormously over the last decade. China now accounts for about 25% of South Korea’s exports, up from 14.6% in 2002. Korean companies are big now suppliers of equipment and materials needed for China's economic extravaganza.
- South Korea’s annual per capita income of about $20,000 is at market prices only $5,000 behind that of Japan and it is catching up fast.
- South Korea is the world's most wired nation - 95% of homes have broadband, compared with 58% in Germany. The country is also home to one-fifth of global lithium battery production
Investing Options in South Korea
South Korean Companies Listed On NYSE As ADRs
- Samsung (SSNLF.PK): Samsung, which recently overtook Hewlett-Packard (HPQ) to become the biggest electronics company by sales in the world, is this year on track to make more money than the top 15 Japanese electronics companies combined.
- Hyundai (HYMLF.PK): The world's fastest-growing auto-manufacturer, it has increased US market share from 3.7% to 4.4% in just 12 months.
- LG (LGERF.PK): LG Electronics Inc.
- Korea Electric Power Corp. (KEP): generates, and sells, electricity throughout South Korea.
- KT Corp. (KT): provides telephone, and broadband Internet services.
- KB Financial Group (KB): is a Seoul-based bank with over 1100 branches in South Korea.
- Shinhan Financial Group (SHG): is a Seoul-based, bank holding company.
- LG Philips LCD CO., Ltd. (LPL): makes, and sells, thin film transistor liquid crystal displays panels.
- Pixelplus Co., Ltd. (PXPL): makes, and sells, complementary metal oxide semiconductor image sensors.
- Gmarket Inc. (GMKT): is an e-commerce marketplace which sells numerous types of products including clothing, beauty products, computers, electronics, furniture, jewelry, sporting goods, automobile accessories.
- POSCO (PKX): makes, and markets, hot rolled steel products that are used for manufacturing structural steel.
- Gravity Co., Ltd (GRVY): is a developer and marketer of online games.
- Hanaro Telecom, Inc. (HANAY.PK): is Korea's largest telecommunications company.
- SK Telecom Co. Ltd. (SKM): is a wireless telecommunications services company.
South Korea ETFs: 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 iShares ETF South Korean Index Fund (EWY): The exchange-traded fund holds shares in roughly 100 of South Korea’s largest companies.
The index measures the performance of the South Korean equity market.
EWY Top Ten Holdings:
1. Samsung Electronics Co Ltd: 17.31%
2. Posco: 6.27%
3. Hyundai Motor Co Ltd: 4.45%
4. Shinhan Financial Group Co Ltd: 3.78%
5. KB Financial Group (KOKBFG): 3.27%
6. Lg Chem Ltd: 2.95%
7. Hyundai Mobis: 2.68%
8. Samsung Electnc: 2.30%
9. Hynix Semiconductor Inc: 2.18%
10. Hyundai Heavy Industries Co Ltd: 1.94%
Other ETFs investing in South Korea:
IQ South Korea Small Cap ETF (SKOR), which focuses on small-cap South Korean companies like Kumho Industrial and Daum Communications Corp.
The market cap-weighted Index seeks to provide investors with a means of tracking the overall performance of the small capitalization sector of publicly traded companies domiciled and primarily listed on an exchange in South Korea.
Expense Ratio: 0.79%
PowerShares FTSE RAFI Asia Pacific ex-Jp (PAF): The Index is designed to track the performance of the largest equities of companies domiciled in the Asia Pacific region (excluding Japan) and allocates 33.8% of its assets to South Korea.
Expense Ratio: 0.80%
iShares MSCI Asia excl Japan (AAXJ): The index measures the performance of 11 developed and emerging equity market and allocates 20% of its assets to South Korea.
Expense Ratio: 0.74%
Overview Of The South Korean Economy
Home to one of the fastest growing GDPs between the 1960s and the late 1990s, South Korea went from being one of the poorest agrarian countries in the world to a high-tech industrialized country. The data and facts speak for themselves, the increase in GDP from $2.3 billion in 1962 to $928.7 billion and the GNI rose from $87 to $19,231. South Korea’s economic structure is based on plentiful natural resources, a population of 1.5 billion people, a huge consumer market and an export-oriented development strategy.
From 1997 to 1998, South Korea was faced with issues regarding the Asian financial crisis. At that time, the South Korea GDP (Gross Domestic Product, Current Prices, US Dollars) dropped to 6.9%. However, by the end of 2000, the GDP saw some recovery when numbers closed at 9%. Realizing something had to be done the government of South Korea created a number of reforms after the financial crisis to include being more open to foreign investments and accepting a greater number of imports. By 2003, the country’s GDP had grown between 4% and 5% annually but once the global financial crisis hit, the GDP slowed down to 2.2% in 2008 and unfortunately, by 0.8% by 2009. On a positive note, the South Korean economy has started to recover in part because of growth in exportations, lower interest rates, and a better fiscal policy.
Foreign investors find South Korea’s legal system a real impediment and the country fails to attract much foreign investment, receiving about $11 billion annually compared with $90 billion for China. But the fate of foreigners investing in Korea is never so clear. A culture of erratically enforced regulations and a notoriously militant labor union movement recently forced Wal-Mart out of South Korea.
North Korea: The biggest threat of investing in South Korea is that the future of the region does not entirely depend on South Korean policies but also on North Korean dictator Kim Jong Il who is the real wild card in South Korea's political and economic future. The best-case scenario for the region could be a potential reunification, but most political observers feel that the possibility remains bleak in the near future. Tensions between the North and South have continued unabated since their civil war ended in a cease-fire 57 years ago. North Korea's economy is looking more troubled than ever and regime collapse would present the south with unbelievable financial problems.
The North Korea-South Korea political issue is much more than an economic concern for the two nations and, if things get out of hand, it might mean a bigger crisis both financially and politically across the globe. Astral Projections, an Astral guide World events forecast and prognosis and projection blog, has expressed concern over the region, predicting some action in the Korean peninsula. The blog further says:
"The period of Aug 1 to 14th specially around 3rd Aug on will be very important to watch. This can bring about changes and impulsive actions. Things can start happening suddenly that increase the tensions--possibly seemingly unrelated incidents and even accidents. Relationships with Neighbors can become difficult during this period as the tensions affect behavior. It is important to keep open, honest communication with significant opponents. Some impulsive action may happen which if not avoided could bring about some painful experience."
South Korea Outlook 2010
With the South Korean economy reportedly regaining growth momentum in 2009, it is widely expected to continue with a positive growth in 2010, beating its peer countries. The finance ministry and the central bank both announced that the economy would make a better-than-previously-expected performance in 2010, with the finance ministry expecting a 5% growth and the BOK saying a 4.6% gain.
International organizations, such as the IMF and the OECD, also remained optimistic, saying a growth of 4.5% and 4.4%, respectively, is likely. The Bank of Korea raises its benchmark interest rate last week, removing monetary stimulus and simultaneously signaling confidence in its internal growth; GDP estimates for 2010 are at 6%. Moreover, South Korea recently logged a record trade surplus; both exports and imports surged 33%+ from the year prior.
Despite optimistic views prevalent in the market, South Korea's economy still faces uncertainties as the government mulls a right time to put an exit strategy into action.
Disclosure: No positions