So what about the short-term outlook for the economy? Here, the prospects seem reasonable.
Price is ultimately what matters with any investment. And on this front, South Korea looks attractive. It’s the cheapest market in Asia, trading at just 8.8x this year’s earnings, a 24% discount to Asia ex-Japan’s 11.6x PER. Consensus forecasts 13% earnings growth in 2014, versus 12% for the Asian region.
No investment is without risks and these risks need to weighed against the potential rewards. I see three key risks for South Korean stocks:
- Any recovery stalls in developed markets. The US recovery is painfully slow, but it’s better than elsewhere. Particularly the EU, where deflationary risks remain. If economies in these regions lurch downward again, South Korea would be disproportionately impacted.
- The yen is also a big risk. Regular readers will know that I foresee a much lower yen in the medium term given the Abe government’s insane money printing policies. Given a lower yen, Japanese exporters are expected to provide much stiffer competition to their South Korean counterparts going forward.
- The obvious long-term risk is North Korea. A messy and violent reunification with the South would seriously dent future economic prospects.
In my view, the first and second risks are already partially if not fully factored into South Korean valuations. If these things don’t eventuate, or not to the extent envisaged, then the upside for stocks is pretty clear.
AC Speed Read
– South Korea stands out as a buying opportunity amid the indiscriminate emerging markets sell-off.
– The country’s short-term economic prospects are positive given its sound financial position reduces risks from QE tapering. Also, its export-led economy has significant exposure to the US recovery.
– Long-term, South Korea manufacturing prowess could turn it into the next Germany. There’s also the prospect of reunification with North Korea, which would prove an investment boon to the South.
– Valuations are cheap as well, with South Korea trading on just 8.8x 2014 earnings. World-class companies such as Kia are priced at just 6x earnings.
– Potential risks include a slowdown in developed market economies and a lower yen making Japanese exporters more competitive vis-a-vis their South Korean counterparts.
This post was originally published at Asia Confidential: