Tributes to South Korea's Investment Climate

 | Aug 29, 2013 | 11:00 AM EDT  | Comments
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EWY

Emerging markets have been in the news a lot recently, and not necessarily for the right reasons. Rising interest rates over the past three months triggered by "tapering" talk from the Federal Reserve have played havoc with a myriad of overseas currencies and markets.

Both the Turkish lira and the Indian rupee are in significant decline and recently hit all-time lows against the dollar.  Indonesia, Malaysia and Brazil also have falling currency values that bear watching.

These currency fluctuations have played havoc with overseas markets. In contrast with the gains our market has provided for investors through the first eight months of 2013, most of these overseas markets are showing losses for the year. The losses have accelerated over the past few months in conjunction with rising interest rates. Being a contrarian, I think this smells of opportunity.

I am not quite ready to allocate money to markets with free-falling currencies and markets. I do see some value, however, in other overseas markets that have been hurt by association. One market that I have already deployed capital into and plan to up my allocation on any future dips is South Korea. The main index, the KOSPI is down for the year and has declined some 10% since its recent highs -- even after a decent rally over the past few weeks.

The market has been affected not only by rising interest rates, but also by the rapid depreciation of the Japanese yen. Korea offers many attractive features. It has better demographics, a lighter debt load and more innovative companies (Samsung) than Japan. It also offers more transparency, rule of law and more trustworthy accounting practices than China. South Korea also is one of most "wired" countries in the world with broadband speed and penetration rates much higher than the United States.

The country learned its lessons from the 1998 Asian financial crisis as well as United States-triggered financial crisis of 2008/2009. It has more than cut in half the amount of short-term external debt it uses vs. 2008. The country has also instituted other measures to limit the impact of this "hot" money. While most of Asia has been leveraging up over the last few years, Korea has been deleveraging.

Yes, there is the matter of the despotic Hermit Kingdom next door with nuclear capability. South Korea, however, has had 60 years of experience in dealing with its irrational and impoverished northern neighbor. More importantly, these fears are fully reflected in its market where equities sell for about 9x earnings.

The easiest way to invest in Korea is through an index fund like iShares MSCI South Korea Capped (EWY). South Korea just posted its fastest quarterly GDP growth in two years, is starting to open its telecom sector and should continue to benefit from the long term economic growth of China. It is one of the few countries outside of the United States where I am currently allocating funds within my portfolio.

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