Saturday, July 9, 2011

I am bullish on South Korea-----by Shan Saeed

South Korea economy size might touch US $1 trillion in 2011. When one talks about Asia, there is passing reference to South Korea but never some in-depth analysis has been done. And I believe we are coming upon a period of high growth in South Korea during the rest of this year and year after.

As I have always maintained, this decade belongs to Asia. And Asia is full of heavyweights such as China, Indonesia, Japan, Singapore, Malaysia, Thailand and then down the chain. But one country almost always floats under the investment radar based on the difficulty to trade the market.

South Korea is a bustling and booming country. It is annoyed from time to time by its pesky and wanting to be flamboyant neighbor, North Korea. Once you get past the distractions, you will see a vast landscape of rapidly growing industrial complexes. Being surrounded by ocean, its shipping might and prowess is well known, but did you know they own some seriously large shipbuilding industries in Europe? They have spread their wings well past their borders and are an international force to reckon with.

Their auto, chemicals, heavy equipment and tech industries are making rapid strides across the globe. And nothing drives the point home more than the recently released industrial production (IP) data. The IP rose by 8.3 percent year over year, well above the market expectations of 6.9 percent year over year.

For all of you out there wondering about the effects of the Japanese earthquake and tsunami, it seems like the slowdown lasted for a couple of months only. The IP moved up 1.7 percent month over month, which is a sharp reversal from the 1.7 percent decline in April. So the effects of Japan don’t seem to last too long. I m bullish on Japan as well.

Not only was the IP strong, but it was good in all the right areas. Manufacturing production was up, as was equipment and auto. The weak spot was tech. I am confident that it will be on the rise in the next month or two.

While it is fair to focus on auto and manufacturing in South Korea, it isn’t fair to neglect the booming internal economy. As one can imagine, the service sector within South Korea didn’t tumble due to Japan and continues to show even growth. But the wholesale sector has jumped by nearly 2 percent year over year. The financial sector also is beginning to stir and show life. And the fascinating story is that the financial sector didn’t take a hit at all. So it is pure gain there.

Moving to the macro-economic story in South Korea – inflation is beginning to get high and sticky. Despite the raising of the interest rates this year, inflation hovers around the 4.4 percent mark, well above the central bank’s tolerable rates of around 4 percent.

I am now beginning to get concerned about the secondary effects of inflation there. The inflation has been high for a period of time and will now start to percolate to different sectors within the economy.

And this will mean that the central bank will have to raise rates at least twice, if not three times, this year. And we all know, higher interest rates equals a stronger currency. And I expect that the currency will overshoot before it regulates next year. I expect a 4 percent to 5 percent appreciation in the currency for the rest of this year against US dollar.

Add that to the handsome appreciation you can garner through carefully selected stocks, and you can expect a very good double-digit return from Korea over the remainder of the year. South Korea is the 4th largest derivative market right now.

The trick is how do you invest? Most U.S. stock brokers don’t offer you the ability to buy South Korean stocks. But the wise international investor knows a trick or two about finding a legal and valid way around that.

Using legitimate stock brokers in Hong Kong and Singapore, you can easily invest in South Korea. Yes, it takes a couple of weeks to set up an account, but once you are past that, Asia truly opens up for you and you can become a truly global investor without leaving your easy chair in the house.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK

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