Keep An Eye On South Korea

By Aaron Levitt | September 12, 2010 AAA

With many analysts predicting slow and anemic growth for the U.S. economy over the next few months, many investors have once again turned their attentions overseas in search of opportunities. The iShares MSCI Emerging Markets Index (NYSE:EEM) has once again become a popular investment vehicle, regaining much of its first-half losses. However, there are few vocal analysts that have recently questioned the Chinese economic machine and there are still risks involved in emerging markets investing. Nonetheless, investors still need a healthy dose of international investments in their portfolios and one nation is straddling the gap between emerging and developed markets.

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An Asian Tiger
South Korea offers the best of both emerging and developed world markets. The high-tech exporting economy has thrived in the global credit crisis. In the first quarter of 2010, GDP increased by nearly 8.2% versus the first quarter of 2009. Industrial production is up 20% from the year prior. This increase in global trade and exports has given the International Monetary Fund (IMF) reason to boost its GDP forecast for South Korea for full-year 2010 to 5.75%. This is an increase of about 28% from the IMF's previous forecasts. Switching gears from a pure manufacturing economy to one based on high-technology innovation, South Korea has managed to stay competitive on a global landscape. This competitiveness has not been lost on analysts. Index provider MSCI (Nasdaq:MSCI) recently stated "South Korea continues to meet most developed markets criteria ... This year the country narrowly missed getting its upgrade from emerging market status to developed status."

Long term, the nation offers continued growth prospects. Korean companies have been making inroads into other emerging markets such as India. South Korea is also a beneficiary of China's recent policy to float its currency. As the Yuan's dollar peg is slowly removed, high-tech South Korean freight becomes more cost competitive in the international marketplace. This will strengthen demand for its exports. Recent trade talks with the United States will also benefit the nation's exports.

Finally, South Korea's national balance sheet is strong. Government spending in the nation only accounts for about 25% of GDP. This compares with 115% in Greece and 192% in Japan. This is the lowest percentage of OCED member nations. South Korea also enjoys a budget surplus.

South Korea in a Portfolio
Now might be the time to add South Korean equities to a long-term portfolio. Stocks from the nation trade at a dirt cheap price to earnings ratio of around 10. South Korea's ties to the United States make it relatively easy to add its stocks to portfolio. For those investors who want a broad emerging market approach for addition of the nation, the First Trust BICK Index (Nasdaq:BICK) replaces Russia with Korea in the popular BRIC theme. For a strictly pure play on South Korea, the iShares MSCI South Korea Index (NYSE:EWY) follows 102 different stocks on the Kospi Market. The fund charges 0.65% in expenses and has averaged a 9% annual return since inception in 2000.

For investors wanting to take full advantage of the future growth prospects of South Korea, the IQ South Korea Small Cap ETF (Nasdaq:SKOR) tracks a basket of 99 of the nation's fastest growing small caps. (Learn more about small caps, read Small Caps Boast Big Advantages.)

There are several Korean ADRs that trade on the big boards for investors to choose from. Korea's adoption of smart phones and broadband infrastructure has helped leading telecommunications provider SK Telecom (NYSE:SKM) find outsized profits in recent quarters. The worldwide growth of energy efficient LCD and LED television and monitor panels means long-term growth for panel maker LG Display (NYSE:LPL). Finally, the emerging market infrastructure boom is having dramatic results at steel maker POSCO (NYSE:PKX). The company will continue to see high demand for its products as governments in these nations spend big bucks building out their nations backbones.

Bottom Line
As investors look for growth internationally, South Korea should not be ignored. With the nation's focus on high technology, it is quickly emerging as an exporting superstar. Investors looking for a high growth emerging market, but with some developed market tendencies, South Korea fits the bill. Portfolio additions can be had either through the previous equities or the PowerShares FTSE RAFI Asia Pacific ex-Japan (NYSE:PAF). (For related reading, take a look at Finding Fortune In Foreign-Stock ETFs.)

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