Mitchell Thomas, The Daily Record Newswire
Decades in the past, we epitomized South Korea as a nation exporting cheap inferior products to the world. A stereotype that often consisted of a waste basket filled with junk; certainly not a claim of a highly regarded imported asset.
Time has elapsed and progress has been achieved in a country that has elevated itself to world stage status. South Korea has proven to move up the ranks as the fifth largest economy in the Asian sector with a measured $1.12 trillion economy and is ranked 15th in the world.
South Korea’s economy is dominated by manufacturing and industry, which comprises 39 percent of GDP. We are familiar with the improved quality and value of their autos and electronics and their acceptance by consumers throughout the world. However, an unknown factor is their shipbuilding expertise, commanding 50 percent of the world’s shipbuilding market and owning four of the largest shipbuilding companies in the world. A country devastated by war only a half century ago has now become a world empire in manufacturing.
Their astute knowledge of having an economy dependent on manufacturing and exports can be cyclical in nature causing them to realize the severe economic impact on them personally when global economies contract. Transitioning to a service oriented economy has been gradually surfacing, creating an insulator to this cyclicality. This segment currently garners 58 percent of their GDP and employs 68 percent of the workforce. The current jobless rate is three percent, one of the lowest in the world, certainly a testament to their visionary discernment.
Korea has proven their acumen to have a defensive economy. History has shown their ability to remain recession proof during the global debt crisis in 2007-2008. In 2012, investors were searching globally for a safe haven currency to avoid potential fallout in their own country’s debasing of their currency. South Korea experienced a 10 percent appreciation in the won versus the U.S. dollar in 2012. This appreciation constrained inflation to 1.5 percent and affirmed their ability to remain within their self-imposed guidelines of three percent.
However; the down side to a strong currency is a constriction in the export sector. The growth to GDP was one and a half percent in 2012. To alleviate this conundrum, the government is instigating a greater consumption by their citizenship.
When investing in South Korea, vital measures are necessary to make educated decisions. Relatively speaking, the current P/E ratio for South Korean equities is 9.62 and the projected estimate in 2013 is 8.58. Comparably, other developing Asian countries are demonstrating higher P/E’s.
Sovereign debt obligations have been seriously extended throughout the world by central banks causing constraints in many developed nations hampering their ability to stimulate. Nevertheless, Korea has been able to maintain public debt to 33 percent of their GDP. Preserving a very low outstanding obligation allows the government to stimulate their economy if necessary without handcuffing future generations.
World trade is Korea’s survivor mechanism. South Korea negotiated trade agreements in global commerce and has become a respected participant among the world organizations of the G20, OECD and WTO. They signed an agreement with the U.S. in 2007 making us their second biggest trade partner. This has solidified their future export expansion by removing previous barriers.
The obvious variable on the political agenda when discerning South Korea as an investment is their formidable enemy, North Korea. Kim Jong-Il appointed his son, Kim Jong-Un, to power prior to his death in late 2011. North Korea’s bellicose attitude and overt actions to its world critics as well as a belligerent attitude towards its allies has created alarming headlines. Compromise has been illusive and sanctions have not slowed the potential nuclear power from expressing complete disdain toward world authority.
The collapse of their domestic economy hasn’t lessened their progressive willingness to recently launch missiles for testing and a satellite imposing a global nuclear threat. Ultimately, like all conflicts, compromise will only come to fruition when it serves the leaders best interest and not necessarily the country. Hopefully, resolution will occur but until then the threat exists to South Korea’s peace.
Investing in South Korea offers diversity and the added bonus of garnering exposure to their neighboring trading partner’s prosperity. Manufacturing, exporting and shipbuilding have shown that South Korea can stay afloat when other countries’ economies are sinking.
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Mitchell Thomas is an international equity analyst/portfolio manager/head trader for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. He can be reached at (585) 586-4680.
