Published:
September 20, 2007
Investors currently have a historic
buying opportunity -- an opportunity very similar to what we saw
in the S&P back in 1982. But this great opportunity does not lie
in U.S. stocks. Instead, it exists in a little-publicized
foreign market with enormous long-term potential.
Not only are stocks in this foreign nation cheap, but its economy is also on solid footing, with Gross Domestic Product (GDP) surging at an annualized rate of +5.0% in the most recent quarter. In fact, this economy has
grown at a consistent clip of at least +4.0% in each of the past three years, and that growth now looks to be accelerating.
This nation's economic health has historically been tied to exports rather than domestic demand and expenditures. But the consumer is awakening -- consumer expenditures climbed a healthy +5.75% in the most recent quarter, and household income is growing at
around +4.75%.
In the early part of this decade, a bubble in credit card and other personal debts hit local banks hard as consumers became overstretched and started defaulting on loans. Now, however, these institutions have resolved the bulk of their bad debt issues and have become far more conservative about lending -- the financial system is healthier and better capitalized than it has been in years. Mortgage lending is growing again at a sustainable pace, and the housing and credit markets are healthy.
Of course, I'm not talking about the U.S. here. Rather, this historic buying opportunity is to be found in South Korea. The country's main stock market index, the KOSPI, currently trades at around 10.8 times trailing earnings, making it even cheaper than the S&P 500
was roughly 25 years ago. That's right -- to find the S&P trading at a P/E below 11, one would have to travel back
in time to the very beginnings of the great bull market in stocks that began in 1982.
Meanwhile, the economy and consumer spending are growing at a much faster pace than in the U.S. Even better, Korea is located in the center of the world's most dynamic growth markets -- in the very heart of Asia.
This small peninsular country has become a global leader in a
variety of electronics and industrial markets. South Korean
cars, once considered low quality and unreliable, are making
headway in the U.S. and other developed markets. And South Korea
has long been known as a world class player in electronics --
Korea-based Samsung has become a household name worldwide over
the past few years.
And South Korea remains an export
powerhouse.
This export growth has continued despite an economic slowdown in the U.S., which has historically been a major destination for Korean exports. That's because Korea's export base has grown more diversified in recent years -- fast-growing Asian nations as well as Europe are also important destinations for Korean goods.
South Korea certainly isn't the obscure economic backwater it
once was. With a stable government and legal system, investors
are beginning to re-evaluate the country's risk from an
investing standpoint -- over time, market valuation levels are
likely to rise to reflect the lower perceived risk.
Buying Korea
It's easier than ever for U.S. investors to invest abroad and take advantage of fast-growing companies based in South Korea.
The simplest way to gain diversified exposure to this market is with an ETF, such as
the South Korea iShares
(AMEX: EWY, $67.42). This fund offers exposure to some of Korea's most promising firms, including many that aren't readily available to U.S. investors. For example, the iShares have a 15% weighting in electronics giant Samsung -- this firm has been growing at a solid pace in recent years and has garnered a solid brand name the world over. But Samsung doesn't offer an ADR for U.S. investors. As a result, the iShares offer one of the simplest means of buying the stock.
And, of course, the iShares offer exposure to some other well-known Korean
stocks, including Shinhan Financial (NYSE: SHG), steel-maker
POSCO (NYSE: PKX), and Korea Electric (NYSE: KEP) -- these three stocks are among the South Korea iShares' top five holdings.
Overall, the ETF offers a roughly 20% weighting in each of Korea's three prime industry groups -- financials, technology, and industrials. And with a reasonable expense ratio of just 0.7%, EWY is a smart, inexpensive way for investors to gain diversified exposure to the South Korean market.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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About Paul Tracy
Paul Tracy co-founded StreetAuthority.com and became the firm's
Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in
2006. Prior to that he spent several years as Managing Editor at a multi-million
dollar financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also responsible
for equity research and managing a team of seasoned professional financial
writers, researchers and market commentators.
Paul's previous experience includes a position at Robert W. Baird & Co.'s
full-service brokerage operations as well as economic research work on a Money
and Banking project funded by the National Bureau of Economic Research. He has
also spent time doing outside consulting and research for the University of
Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
the U.S.
Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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