Put Gangnam Style in Your Portfolio
06/07/2013 7:45 am EST
South Korea's economy is growing at a faster pace than any rich country, says Martin Hutchinson of Money Morning.
South Korea is a rich country with a large stock market. It is in the epicenter of the world's most dynamic growth, and its balance sheet is stunning in a time of broad global malaise.
Along with everything else it has going for it, South Korea just elected a center-right president-Park Geun-hye-who should be in office till 2017, and has a solid majority in Korea's congress.
But more compelling, South Korea isn't benefiting from artificial fiscal stimulus. It runs a budget surplus. The country's short-term interest rate is 2.75%; inflation is 1.3%; and it has a thumping current account surplus of 4.5% of GDP.
And South Korea is expected to grow at 2.9% in 2013 and 3.8% in 2014. That may not sound like much, but is the fastest of any rich country.
South Korea is a technological leader, especially in the areas of display systems (portable computers that can be rolled up like a newspaper!) and stem-cell biotech innovation.
In genetic engineering, its lead may become more strategic in nature, since Korean public policy does not place the limitations on biotech innovation that the United States does.
But 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 allows 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 20 years ago.
The Korean market is valued at a moderate 16 times earnings, according to the Financial Times, compared with 17 times earnings in the slower-growing US.
However, since Korea has not pursued the funny money or funny-budget policies of other countries, it's much less likely to get in trouble. While North Korea is obviously a worry, overall South Korea is an excellent safe haven from the nasties that affect the rest of the world.
There are a number of ways to play the South Korean market. Here are my top three:
The largest Korea-focused ETF listed in the US is the iShares MSCI South Korea Index ETF (EWY). With net assets of $3.2 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 ten times earnings, but a yield of only 0.6%.
Korean banks are very reasonably valued in terms of net assets, yet are nicely profitable. The largest financial group is Woori Finance Holdings (WF), the parent group of Woori Bank. This is currently trading at only 48% of book value and 5.7 times trailing earnings. Based on last year's dividend, it yields about 2.2%.
Apple (AAPL) is slowly losing market share in cell phones and tablets to Samsung Electronics (South Korea: 005930). Regrettably, Samsung doesn't trade ADRs, but its global depository receipts trade in London, albeit at a price of near $700.
Still, with a projected P/E of 7.6 times 2013 earnings and trading at 1.7 times book value, it's a better deal than Apple because its margins are not so subject to erosion.