In fact, for demographic and budgetary reasons, South Korea is much like the United States was during the prosperous 1990s–not the deficit-ridden, slow-growing place the U.S. has become.
The truth is South Korea, has very little foreign debt, and recently re-elected the pro-business party by a comfortable margin. What’s more, South Korea has kept its government the smallest in the OECD club of rich nations.
So if you haven’t considered investing in South Korea you should.
The Brewing S. Korean Tech Boom
Like the U.S. in the late 1990s, though obviously on smaller scale, South Korea has become a technological leader– especially in display systems like portable computers that can be rolled up like a newspaper and stem cell biotech innovations.
Indeed, its lead in genetic engineering may become more strategic in nature, since Korean public policy does not place the limitations on biotech innovation that the United States does.
What’s new is that South Korea is now also a cultural leader, with its “Gangnam Style” pop phenomenon sweeping the world. That’s small potatoes in terms of immediate revenues, but it does allow Korea to attract the young, style-conscious and footloose (among whom are many of the world’s innovators) in a way it could never have done twenty years ago.
Currently,Korean growth is solid rather than exciting, with The Economist team of forecasters projecting 3.4% growth in 2013.
Nevertheless, with public spending only 33% of GDP compared to 40% in the U.S, a balance of payments surplus and inflation currently running at 1.2% and short-term interest rates well above inflation at close to 3%,
South Korea’ economy is poised for a growth acceleration in a way the U.S. economy is not.
With elections out of the way for another 4 years and rapid growth in its huge but poor Chinese neighbor, faster growth should be heading Korea’s way.
A Fiscally Fit Government
But those aren’t the only reasons to invest. Based U.S. accounting methods, South Korea also runs a budget surplus.
Admittedly, Korea-skeptics like to point out that if you exclude social security, the country runs a deficit of around 0.5-1% of GDP. But if you exclude social security, the United States didn’t run a surplus in the late 1990s either.
Like the U.S. in the 1990s and for similar demographic reasons, South Korea actually runs a surplus of 2.5-3% on its social security account since considerably more people are paying into the account than are drawing from it.
Including that surplus, South Korea will run a surplus of 1.5-2.0% of GDP in 2012.
That means the South Korea stands to benefit from its baby boom being a decade or so from retirement, the same way the U.S. benefited from its boomers in the late 1990s.
But you should also note that South Korea’s budget is also at least as solid as the U.S. budgets from the1990s. Including social security contributions, Korea has managed to run a surplus in an international environment that is certainly not as bullish as it was the latter 1990s.
What’s more, the KOSPI share index is still below its 2007 highs, compared to the late 1990s when U.S. indexes were running at more than double their peak pre-1995 levels.
Three Ways to Invest in South Korea
There are number of ways to play the South Korean market. Here are three:
The largest Korea-oriented ETF listed in the U.S. is the iShares MSCI South Korea Index ETF (NYSEARCA:EWY).
With net assets of $3.34 billion and an expense ratio of only 0.61% EWY is an efficient way of getting exposure to the market as a whole. Currently it has a P/E ratio of only 9 times earnings but a yield of only 0.6%
Korean banks are also very reasonably valued in terms of net assets, yet are currently nicely profitable. The largest is KB Financial Group (NYSE:KB) the parent group of Kookmin Bank. It is currently trading at only 64% of book value and 6.6 times projected 2013 earnings. Based on last year’s dividend it yields about 3.2%.
And as mentioned above, Korea is a world leader in display technologies and its leading company is LG Display (NYSE:LPL). LPL has suffered in 2011-12 from a cyclical downturn, but its third quarter 2012 was once again profitable, and based on analysts’ estimates it should make about $1.50 per share in 2013, putting it on a forward P/E of 9.3 times.
Related: iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO).
Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.