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South Korea May 10, 2001
Like many of its neighbours, the South Korean economy is waiting for the US economy to recover. In the meantime, it could have some interesting investment opportunities.
Author : Bharathi Rajan


Untitled Document
KOREA SECTOR REVIEW

Economic Growth

The Korean Economic Research Institute (KERI) has forecast that Korea will grow by 4.2% this year, after growing 8.8% in 2000. This is in line with similar estimates by the Organization for Economic Co-operation and Development (OECD) which expects South Korea's gross domestic product is to grow 4.2% in 2001 and a stronger 5.5% in 2002. Both believe that the Korean economy has already hit its lowest level and will show signs of recovery in the second half of this year, along with the US economy. KERI cites the fact that domestic consumption has picked up along with exports, suggesting that an imminent economic recovery. The think tank predicts that South Korea will post a US$ 13 billion dollar current account surplus this year.

Colin Ng, Senior Portfolio Manager with UOB Asset Management thinks that the Korean recovery will begin the third quarter of this year. That's when the effect of interest rate cuts in South Korea and the US will kick in. "I think one should look at the 3rd quarter. Given that the lag effect of the interest rates will only come 3 or 4 quarters after the reduction. That's normally the case, because your interest rate cut will not take effect immediately. It will take some time to be filtered down to the real economy."

Corporate Reform

OECD report also pointed out that economic recovery depended on the ability to stick to reform. Several Korean corporates fell into poor financial shape after the crisis exposed their poor financial standing and management. One of the largest Hyundai, is fighting for survival as it scrambles to ensure adequate financing. It carries a large debt load (it is one 1-2 times overgeared). After the financial crisis, South Korea did take steps to restructure faltering companies which had long benefitted from government patronage. Significant efforts have also been made to clean up the financial sector. Recently, the government announced in a parliamentary session that it will inject up to US$ 21.2 billion in public funds to help ailing financial institutions, and has pledged to liquidate those found to be unviable in the latter half of 2002.

Korean Stocks Attractively Valued

While South Korea may be facing its fair share of woes, Ng says the Korean market is attractively valued in comparison to other Asian markets. "I think in terms of valuation the Korean market looks the cheapest, compared to the other big regional markets. It is trading at almost 7 times PE multiples, so it's quite cheap. Compare this to Hong Kong which is trading at 16 times PE multiples this year. Its almost half the valuation when compared to other markets in the region."

At the moment he likes stocks like Hyundai, despite its current financial problems, "They are still enjoying growth. They are focused in the right car segment and the valuations is cheap at 6-7 times PE multiples." He also likes discount department store Shinseigei, which he sees as a more defensive stock. "Their earnings growth is underpinned by store expansion, and its a more defensive area during this time than departmental stores. We also look at smaller cap companies. Another stock that is interesting is NC Soft, an online electronic game provider. This company is growing, it has a strong balance sheet. The risk howver is that it is a one product company. But it has recently expanded into US and Taiwan."