Goldman Bullish on Cheapest Asia Market After China

Commuters on street in Seoul.
Ann Hermes | The Christian Science Monitor | Getty Images
Commuters on street in Seoul.

Asia's emerging markets have been among the worst hit amid the recent rout in global stocks, but Goldman Sachs advocates accumulating South Korean equities now, on the basis that the market will fare well in a rising rate environment.

"In a rising rate environment...more cyclical markets like Korea may benefit given their higher sensitivity to global growth than rates," strategists at the U.S. investment bank wrote in a report published on Monday, adding that the export-driven economy will benefit from a stronger U.S. economy.

(Read More: Emerging Markets Could Snap Back, If Fed Cooperates)

While Korea's KOSPI index has not been spared from the equity selloff, it has held up better than some of its peers, according to Goldman. Since hitting its high on May 5, the MSCI Emerging Markets Index has declined almost 9 percent, while Seoul stocks have lost just 4 percent over the same period.

"The inevitable jitters regarding QE [quantitative easing] tapering are not likely to impact Korean equities as much. Note the outperformance of Korea during the recent sell-off," the bank said.

Goldman is not alone in its bullish outlook for the market. In a report published earlier this month, Citi said it's betting on South Korea to deliver big stock market gains in 2013, driven by an improvement in the economy and better corporate earnings growth in the second half of the year.

(Read More: Citi Bets Big on This Asian Market Laggard)

Goldman strategists noted that the market is cheap compared to regional peers. From a price-to-earnings (PE) and price- to-book perspective, it is the least expensive after China.

The benchmark KOSPI is trading at a PE ratio of 9.9, compared with 8.9 for the Shanghai Composite and 20.4 for Japan's Nikkei 225.

(Read More: South Korea Central Bank Holds Rates, as Expected)

Top Stock Pick

Goldman's top pick in the market is automaker Hyundai Motor, forecasting upside of around 19 percent over the next 12 months.

"An improving U.S. economy should benefit Hyundai Motor as the company has strong financing business there and management expects US wholesale shipments to rise 7.4 percent in 2013," strategists said.

(Read More: Strong Won Cuts Into Hyundai Motors' Bottomline)

The company is trading at PE ratio of 5, which Goldman considers inexpensive in a 5-year historical range.