Korean stocks are on fire. The benchmark Kospi index has set a record above the 1,200 mark, making it Asia’s top performer this year – up 37%. The market’s tailwind comes partly from the robust global economy, which helped exports increase by an annual rate of 18.9% in August.
But investors have also been emboldened by the improving domestic outlook. Capital Economics says business confidence is on the rise and retail sales are firm, with consumer confidence – dented by a household debt crisis in 2002 – declining more slowly and poised for a turnaround. The IMF foresees GDP growth accelerating to 5% next year.
But there’s more to the story than a recovering economy. As Lee Won-Ki of KB Asset Management told the FT, Korean firms “have completely transformed themselves” since the Asian crisis. Pervasive restructuring has beefed up transparency and profitability; Korean firms now boast an impressive return on equity of 15%, says Baring Asset Management’s Khiem Do.
This has impressed foreign investors and helped reduce the traditional “Korea discount” to other markets. The same goes for the key factor behind recent gains: the emergence of a long-term equity culture as retirement savings accounts tied to the equity market, or installment funds, have taken off.
Given all this and a cheap 2005 p/e of nine, it’s no wonder analysts have pencilled in a possible rise to 2,000 – another 64% – over the next three years. The only onshore unit trust specialising in Korea is the Baring Korea Trust. Independent financial adviser Bestinvest also highlights the Lloyd George Eastern Opportunities Fund and the Templeton Emerging Markets Investment Trust as possible plays. These have a respective 26% and 16% of their assets in Korea.