Why South Korea is set to Become the Biggest Economic Story of 2008
Economics / South Korea Apr 13, 2008 - 12:35 AMBy: Keith_Fitz-Gerald
Where should you put your money in 2008? And more importantly, how can you make money in 2008? These are not easy questions to answer. With the credit crunch sending shock waves around the globe, and the Fed's dismal attempts to solve the problem, these questions loom large ...
Fortunately, there are some good answers just waiting in the wings. One market in particular not only looks bulletproof, it is posting some of the fastest - and most consistent - productivity gains of all the Asian countries. In fact, this particular economy is one of the most competitive on the planet. And get this: It's dirt cheap, trading at a P/E of only 12.
Many investors have shied away from this mega-growth market - but that hasn't stopped Investing Guru Warren Buffett, who recently made a big bet on this economy, pouring billions of dollars into 20 of its companies. And if anyone knows value, it's Buffett, the chairman of Berkshire Hathaway Inc. ( BRK.A , BRK.B ).
The reason this market is such a bargain right now is because it has such an anti-business government, which has scared investors off. But it looks like that problem is about to be taken care of - and very quickly - and that's what has us feeling so excited about this opportunity.
An investment backdrop like this one - an incredibly competitive economy, with ultra-cheap valuations, and with the addition of a now-supportive government - only happens once in a blue moon. And this mix of positive factors will create a rare opportunity for investors in 2008.
Let me explain...
A Payoff Right Around the Corner
Of course, the economy we're talking about is South Korea. It shouldn't be a surprise for subscribers of either Money Morning or The Money Map Report, since our recommendations in this market already are paying off [more on that in a moment]. And there are good reasons for continued positive payoffs.
Here's what you need to know...
According to both the Conference Board and the Groningen Group Total Economy Database , Korea, as it emerged from poverty into upper middle-income status (1976-1996), enjoyed a productivity growth rate of 5.4% a year. That is an extraordinarily high rate over so long a period. It is little wonder that the Korean economy overall has enjoyed some of the world's most rapid economic growth.
Then came the Asian crisis of 1997, in which Korea suffered badly. For one thing, most of its banks became insolvent and had to be rescued by either the government or by international investors. A center-left government was elected. That was followed in 2002 by the more-seriously leftist government of Roh Moo-hyun, under which the chairmen of three of the top six Korean chaebol conglomerates have been imprisoned, and one of the others has gone bankrupt. Its member companies were split up and sold off, mostly to foreign owners.
So Korean productivity cratered, right? After all, that's a lot of stress for one economy to undergo in only a decade? Not exactly...
Korea's productivity growth rate did decline - but only to 4.6% from 1996 to 2006. That's still higher than anywhere else in the world [Estonia, for example, had higher productivity growth, but has a population of only 1.5 million - not to mention a correspondingly tiny economy]. Just remember, if your productivity grows 4.5% and your U.S., European or Japanese competitor grows only 2%, you are 2.5% more competitive than they are every year in international markets.
That's no small advantage when you're looking at overall growth in worldwide market share.
Those positives have already translated into robust stock-market gains .
In 2007, for example, Korea's stock market rose nearly 32%, faster than Singapore (17%), Australia (12%), Thailand (26%) and the Philippines (21%), according to The Associated Press . Comparatively, the blue-chip Dow Jones Industrial Average Index rose 6.77%, the tech-laden NASDAQ Composite Index gained 7.81% and the broader S&P 500 Index rose a meager 3.45%. Japan's Nikkei 225 Index actually dropped 11%.
The bottom line is that the Korean economy is virtually bullet proof.
So what do we have going for 2008? Let's take a look...
A Portfolio Set to Soar
Kookmin Bank ( KB ) is the largest bank in Korea. KB has been hit by the same investor disillusionment that's blanketed much of the rest of the international financial-services sector. But in the case of KB, the investors were dead wrong. The bank's earnings have continued to make steady progress and it has no exposure to the U.S. subprime mortgage market. Operating income for the first three quarters of 2007 was up 17%, though a decline in non-operating income left overall net income for the nine months flat.
Nevertheless, the bank has a price earnings ratio of just under 10 on trailing 12 months earnings, and a P/E ratio of a staggeringly low 7.6, based on next 12 months earnings, which are expected to increase substantially. What's more, KB has a dividend yield of 5.2%, which is more than you'll get out of Treasuries these days. To our experts, such a low valuation makes KB a strong buy.
SK Telecom Co. Ltd ( SKM ) is Korea's largest mobile phone company, and also has operations in such high-growth markets as China and Vietnam. The stock is now trading about 11 times estimated earnings, with a dividend yield of just over 3% - meaning that income investors can give these shares some serious consideration, too.
Its market share in Korea is creeping up above 50%, and may surge further once the government changes. In China, SKM staged a remarkable coup in 2006, when it invested in a $1 billion convertible of China's No. 2 mobile company, China Unicom Ltd. ( CHU ).
The China Unicom bonds were converted into company shares in August 2007, and the resulting 6.6% share stake in China Unicom is currently worth more than $2 billion.
SKM was recently reported to be interested in acquiring a stake in the U.S.-based Sprint Nextel Corp. ( S ). Although its initial advances were reportedly spurned , if it comes back, and can buy all or part of that company cheap, SKM will gain an excellent foothold in the U.S. market, where its cutting-edge technology can be expected to add market share. That makes this company a strong buy, as well.
Posco ( PKX ) is Korea's largest steel company. It has a P/E ratio of about 14, and a dividend yield of 1%. And Posco has large export operations to China, making it a very strong participant in China's explosive growth. Posco is the world's most efficient steel-maker, and an essential component of your basic industries portfolio. And Berkshire Hathaway's Buffett recently bought a big stake in Posco . Long-Term Buy.
Korea Electric Power Corp. ( KEP ) is Korea's electric power company. It trades at a P/E ratio of 12 on trailing earnings and 11 on projected earnings, and has a dividend yield of 2.4%. KEP's steady growth should benefit from any acceleration in Korea's economic growth rate. Buy.
There you have it: We've outlined for you a diversified basket of holdings from one of the world's most-efficient - and fastest-growing - economies. It's highly likely this Korea portfolio will outperform the U.S. market this year. Moreover, it's a bulletproof shield against the vagaries of what could be a rough ride in 2008.
Additional Reading:
- Money Morning : Warren Buffett and Berkshire Hathaway Purchase Stakes in 20 South Korean Firms, Including POSCO .
- Money Morning : Asian Index Gains Are Early Signs of Global Decoupling.
- Money Morning: The Three Ways to Profit From a Messy Market .
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
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