Korea Emerges into the Spotlight

09/21/2009 12:00 pm EST

Focus: ETFS

Nicholas Vardy

Editor, Oxford Wealth Accelerator

Nicholas Vardy, editor of Global Stock Investor, says South Korea’s economy is recovering nicely, and he tells how investors can profit from this powerhouse’s growth.

In many ways, to call South Korea an “emerging market” is unfair, as it is far wealthier than the relatively poor economies of Asia’s emerging giants. Infrastructure in South Korea is excellent. The streets are clean. The roads are smooth and fast. Buildings are modern. South Korea is also the most “wired” country in the world, with 93% of South Korean households receiving broadband.

Korean companies are also far more advanced than rivals in China or India. Korea is the world leader in semiconductors, digital displays, and consumer electronics. During the last 20 years, Korean companies have matched—indeed, even leapfrogged—their sometimes better-known Japanese rivals. If yesterday belonged to the Sony Walkman and PlayStation, today belongs to Samsung’s dazzling array of high-tech gadgetry.

The Korean economy had been long dominated by the chaebol, or conglomerates, most of which were established after the Korean War. Four of the best known chaebols—Hyundai, Samsung, Daewoo, and LG3 (Lucky Goldstar)—alone produced 9% of the GDP in 1995.

After the crisis of 1997-98, the government forced about half of the indebted chaebols into bankruptcy. The economic equivalent of cod liver oil had its desired effect. Domestic demand and exports surged. By 2003, South Korea had regained its status as a favorite among portfolio investors.

Then came the global financial crisis of 2008. Like many economies in Asia, South Korea was hit hard, with exports slumping by a third. But thanks to government pump-priming, help for car buyers, and record low interest rates, its turnaround has the makings of a “V-shaped” recovery.

Asia’s fourth-largest economy expanded 2.3% in [the second quarter]—the fastest rate in more than five years. That equates to annualized growth of 9.5% and marks the second straight quarter of growth. Manufacturing expanded 8.2% and exports soared 14.7%, the fastest in 5½ years, partly thanks to strong Chinese demand. Domestic demand has rebounded as consumers flocked back to stores. And many of South Korea’s best-known companies issued stronger-than-expected corporate profit reports for the second quarter.

The Korean peninsula’s real-life Dr. Strangelove—North Korean dictator Kim Jong Il—is the wild card in South Korea’s political and economic future. North Korea is still technically at war with the South. But South Korea’s businessmen remain astonishingly unfazed by North Korea’s threatening tactics. When [the North declared] that it was prepared to attack and would no longer respect the truce ending the 1950-53 Korean War, share prices in Seoul actually rose 2.2%.

My bet is that with the South Korean economy’s remarkable resilience, combined with its collection of world-class companies, the country will usher in a new era of sustained profits where investors can also profit from the “miracle of the Han.”

So, buy the iShares MSCI South Korea Index (NYSEArca: EWY) at market today. (It closed below $47 Friday—Editor.)

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