By Martin Hutchinson Contributing Editor Amid all the gloom investors are feeling right now, South Korea has produced some sunny rays. On April 9, the Asian Tiger suggested that its economy could accelerate and that its stock market could take off.
The splendidly named Grand National Party, allied to the new President Lee Myung-bak, won a majority in the local legislature, taking about 153 of the 299 seats itself and having allies and friendly independents that hold roughly another 40 seats. The center-left opposition - in power both presidentially and legislatively until last December - was reduced to around 70 seats.
You may reasonably ask why you should care. There are, after all, about 183 countries in the world, perhaps 100 of which are more or less democratic in nature, which gives you roughly 30 elections a year to worry about. Figuring out who are the "good guys" in that number of races is absolutely impossible - even in Korea, which is one of our more-important trading partners.
Every now and then, however, an election brings a change that is truly significant, either politically or economically. In Korea, this election has brought significant positive economic change.
Since the Asian crisis of 1997, Korea has been run by the center-left. That group didn't do too bad a job: Economic growth ticked along at an average annual rate of between 4% and 5%. The per-capita growth rate is about the same, given that Korea has only 0.4% per annum population growth. There's a budget surplus, and the country also boasts a balance of payments surplus. Overall inflation is only 2.5%. The stock market is around double its 2003 level, which is when the previous [and now-outgoing] government came into power.
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As nice a job as the outgoing government managed to do, its policies also included a few that held back growth. For instance, government spending rose from 21% of Gross Domestic Product (GDP) to 28% over the decade the left was in power. That increase in government outlays saps resources from the private sector by diverting the resources into less-productive public sector uses - reducing the economy's overall productivity growth.
The outgoing government also imprisoned the chairmen of three of Korea's top six chaebol conglomerates, and placed severe restrictions on their expansion. SK Telecom Co. Ltd. (SKM), for example, part of the Sunkyong Group, was not permitted to increase its cell-phone market share significantly above 50%. Only after Lee's presidential election victory in December did restrictions start to relax. In February, SK Telecom was permitted to acquire 44% of its competitor, Hanarotelecom.Inc. (OTC: HANAY).
However, President Lee's more free-market approach seems likely to ratchet Korean growth up a notch. He ran for election on the platform that Korea should expect a growth rate of 7% - not 5% - and with a budget surplus and low inflation rate he is well positioned to deliver his goal. Lee has promised both corporate and individual tax cuts, and a major program of privatization, starting with three state-owned banks - including the Korea Development Bank.
He is also likely to take a tougher stance toward the potentially volatile leadership in North Korea, cutting back on handouts and adopting a harder line against its northern neighbor's alleged nuclear-weapons programs. This newfound aggressiveness by the South Korean leadership will save money both for the government and for the big conglomerates, since they had been expected to undertake unprofitable prestige projects in the North.
There are five Korean stocks that have American Depository Receipts (ADRs) that are fully listed on the New York Stock Exchange and that trade in reasonable volume. Some of these are more attractive than others-Kookmin Bank and SK Telecom in particular seem especially good bargains. Let's take a look at each of the five, starting with an overview and including an investment rating on the shares:
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