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South Korean Stocks Could Rise 20%: Auerbach's Kim

North Korea's attack on South Korea was "symbolically important," but will not lead to all-out war, Richard Kim, head of Korean sales at Auerbach Grayson, said on CNBC Tuesday.

Moreover, Kim said investors could earn short-term trading profits of 20 percent buying such South Korean companies as Samsung Electronics, Korea Exchange Bank and Woori Finance Holdings . Auerbach Grayson is an agency broker, providing execution and clearance for equities, derivatives and fixed-income securities.

On Tuesday, investors chose instead to sell holdings in South Korea, as two exchange-traded funds offering U.S. investors the purest play on the South Korean market sank more than 5 percent each on heavy volume.

The $4 billion iShares MSCI South Korea ETF, which owns big-cap companies like Posco , Samsung and Hyundai Motors, slumped more than 5.5 percent, with more than 6 million shares changing hands before 2 pm ET. Usually only 3.5 million shares change hands, said Paul Justice, a Morningstar analyst.

The IQ South Korea Small Cap ETF, with only 7 million in assets, fell nearly 6 percent. About 21,000 shares changed hands in the less widely-held fund, up from the usual 10,000, Justice said.

The more-established iShares fund has had a volatile performance. Year-to-date the fund was up about 19.5 percent, after rising 70 percent in 2009, according to Morningstar. The fund slumped about 56 percent in 2008.

Investors have flocked to the fund for an emerging-market play alternative to Brazil, India and China, as the Russian market has slumped, Justice said.

"Aside from the North Korean threat, you’re looking at a stable political picture, a country more friendly to foreign investment, and some real leaders like Posco, one of the most advanced steel companies," he said.

Both Korean ETFs were hit hard in the spring, when a South Korean warship sank from what South Korea said was a North Korean torpedo, but they clawed back quickly when investors realized tensions weren't escalating, said Michael Johnston, senior analyst at ETF Database. The current situation is perhaps more troubling as North Korea is in the midst of handing over power to a new leader, which can be a destabilizing time period, Johnston said.

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Disclosures:

Disclosure information was not available for Richard Lee or his company.

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