According to World Bank data, South Korea ranked 24th for overall GDP last year. GDP, of course, is a measure of a country’s economic strength. Their GDP grew from $901.9 billion in 2009 to $1.72 trillion in 2018, an increase of almost 91%. It’s projected to reach $1.99 trillion by 2024. In terms of where the economy stands per person, GDP/capital has grown from $19,138 in 2009 to $33,320 in 2018. The country ranks 30th globally in per capita income.

Why South Korea?

Inflation has remained low following rate cuts by the Bank of Korea in Seoul. Ongoing low rates will have a simulative effect, which is bullish for South Korean stocks. Low interest rates will lead to a weakening of the South Korean won against the U.S. dollar, Euro and other major currencies. This makes their exports more competitive in the global marketplace, further boosting their economy.

Global Asset Management analysts are optimistic about a trade resolution between China and the United States. Investors share our opinion, and this optimism is providing strength to Asian markets, including the KOSPI. The index is trading higher from gains in technology, industrial and financial sectors.

Investor Trade-Offs

The Korean economy has been attractive for international investors for some time. It boasts a combination of rapid growth rates and stability. As with everything, there are trade-offs. Individual investors should always weigh risks against rewards.

Benefits:

• Stable, developed economy: member of G20 and OECD (Organization for Economic Cooperation and Development). Considered an advanced nation.
• Per capita income surpassed $30,000 for the first time last year to reach $31,349 (2018), according to The Korea Times.

Risks:

• Geopolitical: next door to North Korea. While relations between the two countries are improving, North Korea is highly militarized and considered unstable.
• Export Reliant: South Korea is taking the correct steps toward responsible growth but they are heavily reliant on exports, making them vulnerable to global economic contractions.

South Korean ETFs

ETFs are exchange traded funds. They are closed-end mutual funds that trade on the stock exchange. They’re an excellent vehicle for global investments since they offer diversification and professional money-management. ETFs are also more liquid and have lower management fees than closed-end specialty mutual funds. South Korean ETFs include shares of South Korean companies, securities listed in the KOSPI (the Korea Composite Stock Price Index) and possibly South Korean debt instruments (government and/or corporate fixed income products).

The most popular South Korean ETF is the iShares MSCI South Korea Index Fund (NYSE: EWY). The $4.3 billion fund trades on the New York Stock Exchange. Its average daily trading volume is 3,026,785, making it the largest and most liquid of the Korean ETFs. It has a 0.59% management fee. The fund tracks the MSCI Korea 25/20 Index, which is a weighted average of large- and mid-cap stocks trading on the Korea Exchange. It is top-heavy with ten holdings making up half the assets under management. Samsung Electronics accounts for 20%. Other dominant positions include shares in POSCO, Hyundai and LG Chemical.

Other South Korean ETFs:

• Franklin FTSE South Korea ETF (NYSE: FLKR)
• First Trust South Korea AlphaDEX Fund (NASDAQ: FKO)
• HSBC MSCI Korea UCITS ETF (LSE: HKOR)

South Korea ADRs

ADRs are American Depository Receipts. They represent ownership in shares of foreign companies. ADRs are not as liquid as other stocks trading on the major exchanges. Examples include:

• LG Display Co., Ltd. (NYSE: LPL)
• SK Telecom Co., Ltd. (NYSE: SKM)
• KB Financial Group Inc. (NYSE: KB)

Final Words

• Investor interest in South Korea is increasing due to steady economic growth, and membership in both the G20 and the OECD
• The best way for investors to participate in South Korea is through ADRs and ETFs, both of which trade on U.S., London and European stock exchanges
• Overall, South Korea has many investment-related benefits. However, potential investors must consider the geopolitical and other risks in relation to their overall investment goals and temperament.

Global Asset Management is a private investment firm located in Seoul, South Korea. Individual investment recommendations should be discussed with a GAM investment advisor, to ensure suitability.

Check out more on our Global Asset Management South Korea blog.

Growth & Value: Definition

Growth stocks are shares in companies that have reported above-average earnings growth with expected future higher-than-average growth in earnings, profit and share price. They key word is ‘expected’: there are no guarantees and these stocks often involve higher risk and volatility. G.A.M defines growth stocks as having three main characteristics:

1. Higher Relative Prices—Trading at higher price/earnings ratios which investors willingly pay expecting to sell at even higher prices reflecting the future growth of a company
2. High Earnings Growth Track Record—Compared to earnings in cyclical stocks that tend to decline during slower economic times, growth stocks have the potential to show continued higher earnings growth even during depressed economic conditions
3. Higher Beta—More volatile than the overall market. Given the higher relative prices, growth stocks are at greater risk of steep declines in reaction to negative news, especially earnings reports that fall short of analyst expectations

Value stocks by comparison are shares in companies that have good fundamentals but are out of favor in the market. Value stocks can also include shares of fundamentally strong companies that are too small for large investment firms to cover. G.A.M. defines value stocks as having three main characteristics:

1. Lower Stock Market Prices—Trading at lower price/earnings ratios than the stock market and usually lower price/book value. The theory of value investing is to buy shares of solid companies that will increase in price when the market recognizes their true value
2. Lower Industry Prices—Trading at lower prices than stocks in the same sector or industry. The lower prices often reflect investor overreaction to negative news that may include earnings disappointments, legal issues or other bad news in the media
3. Lower Risk and Volatility—There is a tradeoff here. Value stocks are less risky than growth stocks, but they may take time to rise to their true price potential. Therefore, they are better suited to long-term investors who won’t need access to capital in the near future.

Global Asset Management Portfolios

Both growth and value stocks have a place in investment portfolios. They take turns performing well based on where we are in the economic cycle and varying market conditions. People have used statistical analyses to support both growth and value investing. Clients often ask which stocks offer a better chance of generating larger returns for long-term time horizons. The best answer is a mixture of both. During periods where corporate earnings are rising and interest rates are falling, growth stocks perform better. The flip side is they will react more when the economy cools. We mainly find value stocks as mentioned in cyclical industries. These generally increase more in price in the early stages of economic recoveries and to decrease less during periods of rising interest rates. They are less reactive. However, they will lag growth stocks during a strong bull market phase.