With all the fundamentals of a developed market, South Korea should be an investor's delight. Yet, it's still considered an emerging market, which "tars" it with all the concerns that classification sometimes inspires.
So I suggest investors looking for emerging markets with a high stability factor consider the following facts about South Korea.
- South Korea's 2013 per capita income was U.S. $33,155. That's ahead of Saudi Arabia, Spain and Italy, and quickly closing in on France ($35,680), Japan ($37,135) and England ($37,298).
- Its 2012 GDP was U.S. $ 1.13 trillion. This makes South Korea the world's 15th largest economy. Both the IMF and CIA call South Korea an "advanced economy." It has free trade agreements with 11 countries and is currently negotiating 10 more.
- Additional facts attesting to its economic strength are an unemployment rate of 3.2% and inflation of 1.1% (as of December 2013).
- South Korea is a member of the G20, OECD and ASEAN. It is also one of Goldman Sachs "Next 11," which identifies countries with the most promising outlook for investment and future growth. Goldman's criteria include macroeconomic stability, political maturity, openness of trade-investment policies and quality of education.
- South Korea's economy is driven by value-added exports—many of which are well recognized by U.S. investors. Its exports go to China (25%), ASEAN countries (15%), the U.S. (10%), the EuroZone (9%), and Japan (7%).
- Unlike the typical emerging market country, whose export earnings are generated from such price-fluctuating commodities as rice, coffee, copper, or iron ore, South Korea's leading exports are petrochemicals (10%), semiconductors (9%), machinery (9%), automobiles (9%) shipbuilding (7%), steel products (7%), LCD devices (5%), and wireless communication items (4%). Not surprisingly, services and IT comprise 58% of South Korea's total economy; the remainder derives from industrial products (39%) and agriculture (3%)
- South Korea's value-added exports attest to a well-educated workforce, and a government that takes the task of making it so seriously. South Korea has an adult literacy rate of 97.9 %. With the goal of having its citizens perform well on American college-admissions tests, such as TOEFL, English is a required subject from elementary school through high school. Some 23% of Korean high school graduates take their degrees overseas; 14% of them attend undergraduate/graduate school in the U.S.
If there's any concern, it's South Korea's proximity to North Korea, but this might not be the issue people believe it to be. Moody's Investor Services rates North Korea as only a "moderate geopolitical risk," which is the same level given Israel, Saudi Arabia and Taiwan. Additionally, having China as a neighbor and major trading partner is a huge plus. While there is potential risk (and occasional skirmishes) with North Korea, China's economic growth depends on stability, and so it does its best to keep North Korea in check.
Investing in South Korea
There are several ways to invest in South Korea. Seventeen companies trade directly as ADRs on the NYSE (8), NASDAQ (1) or OTC (8) (full list below), and there are several South Korea ETFs. Additionally, the Bank of New York offers the Mellon Korea ADR Index which tracks American depositary receipts of South Korean companies.
Well-known South Korean ADRs include Posco, SK Telecom (SKM), and LG Philps (LPL).
The largest and most widely traded ETF is the iShares MSCI South Korea Index Fund (EWY), which has 106 holdings and current net assets of $4.2 billion. Its top 10 holdings include South Korea export kings Samsung, Hyundai, SK Hyandix and LG. Other ETFs are the Asia Pacific Ex-Japan AlphaDEX Fund (FPA), which is 33.8% weighted with South Korea holdings such as Galaxy and Daewoo, and the FTSE RAFI Asia Pacific ex-Japan Portfolio (PAF), which is 30.7% weighted in South Korean stocks such as Samsung, Hyundai and POSCO.
Hyundai Heavy Industries is an example of South Korean competitiveness. The world's premier shipyard, HHI is building 30 mega-ships for boxship carriers Maersk, UASC and China Shipping. These 18,000 TEU vessels enable shippers to deliver goods ever-cheaper and more reliably from China to EU and U.S. markets; HHI is currently the only yard able to build them.
An added bonus: With Samsung, LG, Hyundai, and others both exporting to and operating plants in China, investing in South Korean ADRs and/or ETFs provides investors with exposure to China's 7.3%+ expected growth without the potential risks associated with direct investment in China.
South Korea public companies listed on U.S. exchanges
1. Gravity: GRVY, Leisure Goods
2. KB Financial Group: KB, Banks
3. Korea Electric Power: KEP, Electricity
4. KT: KT, Fixed Line Telecom
5. LG Phillips: LPL, Technology, hardware, and equipment
6. POSCO: PKX, Industrials, metals and mining
7. Shinhan Financial: SHG, Banks
8. SK Telecom: SKM, Mobile Telecommunications
9. Woori Finance: WF, Banks
10. Hanaro Telecom: HANAY
11. Housing Bank, The: HSBJY
12. Insprit: INSSY, Mobile Telecommunications
13. Mirae Corporation: MRAEY
14. Pixelplus Co., Ltd.: PXPLY
15. S-Oil: SOOCY, Oil & Gas Producers
16. Webzen: WZENY, Leisure Goods
17. G Learning Corp.; NRMWY, Technology, hardware, and equipment