Why Should You Invest in South Korea?

The country is also one of the most technologically advanced in the world, employing the fastest broadband speeds anywhere across the planet. South Korean has also used its technological capabilities to build a strong digital economy in government, education, commerce as well as entertainment.

And because of the many tax benefits provided by the Korean government, more than 50% of the world’s Global Fortune 500 companies have invested in this country.

Added to that, South Korea has also established a massive Free Trade Agreement (FTA) that have connected the country to the United States, the European Union and ASEAN.

Another area that is fast showing massive business potential is the Korean Wave. All things Korean are becoming hugely popular across all the corners of the globe, be it fashion, music, film, food, cosmetics and even culture.

So, if you are looking at growing your investment portfolio, this is a good place to do so.

How Can I Invest in South Korean Stocks?

There are many ways in which you can invest in South Korean stocks.

Find the Right Platform

You can find the right global asset management platform that gives you access to Korean stocks, and it doesn’t necessarily need to be a South Korean platform. There are a large number of platforms that provide you with the opportunity to invest in this country.

If you are not a very experienced investor, then it is best to use the services of an asset management firm that has the experience and the platform to do the investing for you.

Of course, you need to keep asking questions and stay informed on what they are doing with your money, and grow your own knowledge base.

Broad Market Index

An easy and low-cost way to invest in South Korean stocks is the broad market index, using ETFs (exchange traded funds). You get instant diversification using just one security traded on the American stock exchanges.

There are three different ways through which you can invest in Korean stocks using ETFs.

Using Indices on South Korean Stocks

The best index that is tracked by 5 different ETFs is the MSCI Korea Index, where the TER (total expense ratio) of the ETFs ranges from 0.45% to 0.74% per annum.

The best South Korea indices today are:

• iShares MSCI Korea UCITS ETF (Acc)
• iShares MSCI Korea (Dist.)
• HSBC MSCI Korea UCITS ETF USD.

The cheapest South Korean ETFs are:

• Lyxor MSCI Korea UCITS ETF (Acc)
• iShares MSCI Korea UCITS ETF (Acc.)
• HSBC MSCI Korea UCITS ETF USD.

Using the Asia-Pacific Indices

South Korean indices are not the only way to invest in ETFs for Korean companies. There are 4 Asia-Pacific indices that you can invest in for Korean stocks. These 4 indices are tracked by 11 different ETFs.

The 4 indices are:

1. The MSCI AC Asia Pacific Ex-Japan: This index tracks stock markets in developed as well as emerging economies of the Asia-Pacific region, but not Japan.
2. The MSCI AC Asia Ex-Japan: This index tracks stocks in developed and emerging economies in Asia, but not Japan.
3. The MSCI AC Far East Ex-Japan: The index tracks stocks in markets of the East Asian region, but not Japan.
4. The MSCI Emerging Markets Asia: This index tracks stocks of large as well as mid-cap companies in emerging markets in Asia.

Using the Emerging Markets Indices

There are two different emerging markets indices that you can use to make investments in South Korean stocks. These two indices are tracked by 14 different ETFs, so you can a pretty good range of choices. The two indices are:

• MSCI Emerging Markets: This index tracks all emerging markets across the world.
• S&P SMIT 40: This index tracks the 40 leading companies of 4 emerging markets – Turkey, Mexico, Indonesia and South Korea.

American Depository Receipts (ADRs)

Another way to develop your wealth management portfolio is by investing in ADRs. This way, you can purchase South Korean stocks on a United States stock exchange.

The downside to investing via ADRs is that they are not as liquid as regular American stocks, so you should be careful when trading with them. Some of the most popular ADRs are SK Telecom Co., Ltd., LG Display Co. Ltd., and KB Financial Group Inc.

A Word of Caution

There is only one word of caution here. When you invest in South Korea stocks, you need to be aware of the geopolitical risks of the region. The country is located in one of the most militarized regions on the globe, i.e., South Korea is neighbors with North Korea.

In response to an increase in client inquiries on this topic, GAM Korea has prepared a fact sheet for general information about preferred stock. Like common stock, preferred stock represents shares of ownership in a company. They are both equities. In terms of asset class, preferred shares perform as a type of hybrid between common stock and bonds. Some aspects are similar to ordinary common stock, and some more similar to bonds. Preferred shares usually pay higher yielding dividends, attractive in our current low-interest rate environment.

The Four Types of Preferred Shares

1. Cumulative Preferred Stock: These require the issuer to accumulate any deferred payments and pay them to the shareholders in the future. This must be done before any dividends can be paid to common shareholders.
2. Non-Cumulative Preferred Stock: These preferred shares have no claim over missed dividends. They tend to have higher dividend yields than cumulative shares to make up for the higher risk.
3. Participating Preferred Stock: These entitle shareholders to participate in earnings above and beyond the fixed dividend. They trade at a premium, and therefore a lower yield.
4. Convertible Preferred Stock: These give the shareholder the right to convert the preferred stock into a fixed amount of common stock after a particular date.

Attributes of Preferred Stock

The main attraction of preferred stock is that they pay higher and more consistent dividends. In terms of risk, they fall somewhere in the middle of stocks and bond. Dividends of preferred shares have priority over dividends of common shares, but they are not guaranteed, as they are in a bond, which is a contractual arrangement. Preferred stock usually pays higher dividends than common shares but it’s important to understand that dividends aren’t guaranteed. They are a disbursement of company earnings to shareholders, just like with common stock. The difference is they have priority.

A secondary attraction is that dividends are taxed more favorably than interest income. Bond interest payments are taxed as regular income. It’s important to always consider the after-tax yield when comparing preferred shares with bonds.

The main risk is that they are very price sensitive to changes in interest rates. They react like bonds and have an inverse relationship between interest rates and prices. When interest rates rise, preferred share prices drop. When rates drop, share prices increase. Also, the company can call back the preferred shares, leaving the owner with the burden and cost of reinvestment. For example, if interest rates drop, the company may call certain preferred shares back and reissue them at a lower dividend. A final issue, as opposed to a risk, is that preferred shares have no voting rights. Owners have no say in electing a board of directors or approving a takeover. Common stock, on the other hand, has voting rights. This is not a concern for the average investors, just something to be aware of.

Preferred vs. Common

• Preferred stock has no voting rights. Common stock has voting rights
• Preferred stock has priority in receiving income disbursements. Paid dividends before common stock.
• Common stock is last in line for assets. If a company goes belly-up, the priority is creditors, bond holders, preferred stock then common stock

Over the long term, as an asset class common shares tend to outperform preferred stock and bonds. Common shares have the largest potential for capital gains and the largest risk of capital losses. Some preferred shares can be converted to common stock, but never vice versa. It is at the discretion of a company’s board of directors whether to pay a dividend. If a company is low on cash, preferred shareholders have priority getting paid. Hence the term ‘preferred’. During insolvency, preferred shareholders have priority in terms of both income and payout from sales of assets.

Read more: Asset Allocation

Preferred vs. Bonds

• A bond represents a loan made to a borrower from an investor
• Preferred shares represent ownership in a company
• Bonds pay income; preferred stock pays dividends
• Bonds have a maturity date, preferred shares can continue indefinitely
• Bondholders have priority over preferred shareholders getting paid out in the event of bankruptcy.

Bonds are a type of fixed income security representing a loan made to a borrower (government or corporate). Investors who own a bond are considered creditors of the borrower. A bond has a maturity date when the principal is paid to the current owner of the bond. The owner then has cash which may need to be reinvested. Preferred shares continue indefinitely, unless they are called. Bond maturity dates are fixed and predictable, which has advantages for aspects of portfolio planning, like establishing ladders. Bonds are liquid, and can be sold if the owner does not want to hold to maturity (unlike many bank guaranteed investment certificates).

There are two types of bonds: secured (asset-backed) and unsecured. Secured bonds are “secured” by company assets, much like collateral for a personal loan. In the event of bankruptcy, the bondholders will receive all or most of their original principal back. Unsecured bonds have no such security and the holders unlikely to receive distributions.

Recommended read: Bond ladders – Simple and effective

For more information, please contact Global Asset Management at their Seoul, Korea office.