Lost in the Shuffle: South Korea Quietly Progresses
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It sometimes seems like South Korea is the Asian tiger that no one ever talks about. Even the American war in Korea is known as the “Forgotten War." While the media fawned over the Japanese miracle in the 80’s (and now China), Korea has plodded along in obscurity, quietly building, developing and diversifying into a powerhouse economy providing the world with well made, affordable consumer goods and technology. As a brand, Korea is not the most exciting story, but it is a story of stability and reliability in a time when reliability is very exciting.
What am I, Chopped Kimchi?
Despite being the most wired country on Earth with a thriving, diversified economy (the fourth largest in Asia) and a strong middle class, South Korea is still classified by MSCI as an emerging country . Greece, meanwhile, on the verge of becoming a failed state, is classified as a developed economy. Go figure.
I guess developed is not a euphemism for sclerotic.
By any objective measure, South Korea is a dynamo, exporting everything from smart phones to flash drives to computers to cars and K-Pop. Teenage girls in Vietnam and throughout the rest of Asia giddily text their friends about their favorite Korean boy bands using their Samsung mobile phones. While the CJ Group is busily expanding their media and film theater portfolio around the region as well. Samsung alone accounts for nearly 20% of GDP as they prepare to upscale their brand and begin taking on Apple (NASDAQ: AAPL) while at the same time being one of Apple’s major suppliers and litigants over IP issues.
As relationships go it’s complicated.
Not Everyone is Struggling in Europe
Exports account for roughly 50% of Korea’s economy and are expected to grow by just over 7% in 2012. Domestic consumption too is expected to grow this year by about 2.7%, with the projected stabilization of oil prices and the appreciation of Korea’s currency, which was interrupted by the fear trade during 2008’s financial crisis, against the US Dollar will complicate the export picture in the medium term. The US Brent Oil Fund (NYSEMKT: BNO) has climbed 16% since bottoming last month on the reality of reduced shipments coming from Iran due to E.U. sanctions.
Korea likely agreed to not import any Iranian oil directly to comply with the E.U.’s demands, because their auto exports to the E.U. have been the beneficiary of the craziness in the European banking system as well as the removal of E.U. import duties. Korean auto sales in Europe were up more than 40% Y/Y in June 2012, or more than 400,000 cars, which is putting extreme pressure on European manufacturers like Peugeot. Hyundai and Kia have seen excellent growth in Europe and the U.S. due to their near unbeatable mix of quality and price.
The iShares MCSI South Korea ETF (NYSEMKT: EWY) is up 1.4% year to date. Samsung, Hyundai and Kia make up more than 31% of the fund’s AUM.
South Korea is not immune to the global economic crisis. And if the Federal Reserve continues to not act until the emergence of a full-blown crisis there will be another explosive move into the U.S. dollar during that period, a result as much of Basel II capital adequacy rules as anything else. But, the Korean government has introduced stimulus and cut rates in order to fend off deflation and maintain GDP growth, which was expected to be 3.6% in 2012. According to the Korea Development Institute, growth in 2013 is forecast to accelerate to 4.1% on strong domestic demand and growth in exports. That forecast is dubious if lawmakers in the U.S. cannot come to terms with their fiscal cliff and a potential crushing tax hike in January 2013. Whether this holds depends on how things develop in the rest of the world, especially in China and the US, Korea’s key trading partners. China has begun to aggressively stimulate its economy, and the question will be whether it will work in the short-term.
In Through the Out Door
As the US and Europe continue to struggle, Korea has looked regionally for opportunities to expand relationships and increase cooperation with other Asian nations. Recently, Korea has begun discussions with Indonesia and indicated its interest in pursuing treaties with other ASEAN nations, including Vietnam. This comes on top of an existing free trade agreement between Korea and ASEAN, already including Indonesia and Vietnam, which eliminated virtually all trade tariffs on Korean goods in the region. As one of the ASEAN+3 nations, Korea is looking at the moves being made by China and Japan to secure resources with their regional neighbors and carving out their piece of the pie.
Korea has been proactive about attracting foreign investment. Korean Free Economic Zones advertise heavily on television in some Asian markets, touting Korea’s strategic location and strength to woo new business and investors to the country. 2011 saw the highest inbound foreign investment flows since 2000, topping $13.6 billion in pledges. Europe led the move higher, investing 57% more than they did in 2010 at $5.03 billion.
China and Korea are in earnest discussions, as well, on their own free trade agreement, which is hoped to boost trade between the nations to $300 billion in 2016. Together, the two trading partners represented trade that grew by 19% annually in 2011.
Recent moves by North Korea’s young new leader, including a gala event featuring the unauthorized use of several popular Disney characters and American pop culture icons, have led to widespread speculation that the rogue nation might be making moves toward a more open policy to the outside world. The logical extension of this is the possibility of reunification of the Korean peninsula at some point. How that would play out is anyone’s guess. But as we have seen with the rapid opening up of Myanmar, events can play out very rapidly once the process begins.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
