Recent Economic Trends Help Make Korea a Hidden Gem in Asia

Recent Economic Trends Help Make Korea a Hidden Gem in Asia

After more than two decades of financial setbacks, recent macroeconomic data is helping Korea overcome the negative economic stigma associated with its economy and equity markets.

Korea, Asia’s fourth-largest economy, posted a $42.2 billion current account surplus, a broad measure of cross-border trade, in the first eight months of the year, according to the Bank of Korea, the country’s central bank. Over the same time period, Japan’s account surplus was $41.5, according to Japan’s Ministry of Finance, making it the first time over the first eight months of the year that Korea has topped Japan in current account surplus since the tracking of such data began in 1980. Korea’s surplus is expected to reach $63 billion by the end of year, according to the Bank of Korea.

Overall, Korea has benefited from improving economic growth in such developed economies as the US, Europe and Japan as 44.5% of Korea’s exports are shipped into those regions, according to the September 2013 BNP research report.

Other encouraging economic news from Korea includes:

  • Domestic retail sales that have been rising in anticipation of the winter season.
  • The Korean won being relatively stable versus other Asian currencies thanks to its fortress of foreign reserves, which surged to an all-time high of $336.9 billion in Sept., according to the Bank of Korea.

We believe that Korea, against the backdrop of recent volatilities experienced in the Asian markets, is an opportunity that warrants a revisit for long-term investors.

Among the reasons we see potential in Korea include its:

Competitiveness — South Korea currently ranks as the fifth-most competitive nation in the world in terms of manufacturing competitiveness, according to the 2013 Global Manufacturing Competitiveness Index comprised by Deloitte©. The country’s attractive cost structure and noted product quality are the key ingredients to its success. Manufacturing competence also adds to Korea’s brand recognition globally.

Resilient corporate fundamentals — The picture for corporations in Korea has changed drastically since the 1997 Asian financial crisis.  Over the years, Korean corporates have gone through massive deleveraging and management restructuring to focus on profits rather than unsustainable revenue expansion.

Compelling valuation – Despite the strong macroeconomic and company fundamentals, the Korean stock market has yet to fully price in such gains as it’s still trading at one of the cheapest valuations among Asian countries. With an improving global recovery outlook, we believe Korea offers good quality growth at attractive valuation.

At a time when investor anxiety over the potential tapering of the US Federal Reserve’s bond-buying program, and the potential liquidity withdrawal from Asia have triggered volatility in many Asian equity markets and currencies, it’s refreshing to see such promise with Korea. We believe that, overall, Korea is an underrated, undervalued structural growth story that deserves a second look from investors seeking to gain or increase their exposure in Asia.

About risk

Securities issued by foreign companies and governments located in developing/emerging countries may be affected more negatively by inflation, devaluation of their currencies, higher transaction costs, delays in settlement, adverse political developments, the introduction of capital controls, withholding taxes, nationalization of private assets, expropriation, social unrest, war or lack of timely information than those in developed countries.

Foreign investments may be affected by changes in a foreign country’s exchange rates, political and social instability, changes in economic or taxation policies, difficulties when enforcing obligations, decreased liquidity, and increased volatility. Foreign companies may be subject to less regulation resulting in less publicly available information about the companies.

With securities solely concentrated in Korea, performance is expected to be closely tied to social, political, and economic conditions within the country and could be more volatile than the performance of more geographically diversified investments.

Paul Chan, CFA

Portfolio Manager

Paul Chan is a portfolio manager with Invesco.

Mr. Chan entered the industry in 1990 and joined Invesco in 2001 as an investment director and head of Hong Kong Pensions. Previously, he was deputy regional director at AIGIC (Asia) Limited, where he managed regional portfolios and chaired the regional stock selection committee. Prior to that, he held positions with William Mercer Limited (Singapore), Morgan Stanley Asset Management (Singapore) and Merrill Lynch Asset Management (Hong Kong) Limited.

Mr. Chan earned a BS degree in economics from the University of Manitoba. He is a CFA charterholder.

Simon Jeong

Investment Director

Simon Jeong joined Invesco in May 2006 as an investment director specializing in the Korean market.

Mr. Jeong was with Franklin Templeton Investment Trust Management Co. in Seoul from 1996 to April 2006. He started as an equity investment analyst before becoming a portfolio manager in July 2001, with sector responsibility for the steel, auto, shipbuilding and construction sectors. Prior to that, he spent nine years with Good Morning Shinhan Securities Co., including five years in the fixed income department.

Mr. Jeong earned his MBA from the University of Rochester and a Bachelor of Economics degree from the Seoul National University.

 

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