Investing in an 'Asian Tiger'? Expect Volatility

South Korea’s vibrant, resilient economy has earned it a rank among the so-called Asian tigers, although its export-driven industries have created volatility for its markets and economy as it has grown to global prominence over the last 40 years.

Bloomberg | Getty Images

South Korea’s status today is a far cry from where it was in the fall of 1997, when the Korea's currency — the won — sank against the dollar and the nation was at the door of the International Monetary Fund seeking a $57 billion loan.

But that financial crisis, which started in Asia but affected the global community, was a turning point. It exposed the weakness of Korea’s financial systems and corporate structures. And government officials and corporate executives quickly learned from their mistakes.

This special report on investing in South Korea will look at the nation’s economy today, and how a build-up in foreign exchange reserves, as well as a stronger financial system and fiscal spending, have left the country in better shape to withstand the current global turmoil.

That might not be evident in the Korean Composite Stock Market (Kospi), which has had a roller coaster ride of a year thanks to the global turmoil triggered by continuing debt problems in Europe and — of particular interest to Korea’s exporters — a slowdown in China. But analysts generally expect the Kospi to recover before the end of the year, in part from policies in China to stimulate growth.

Investing in Korea can take some skill, however. The country has exposure to export-driven industries and large numbers of foreign investors and is dominated by large family-run conglomerates, all factors that lead to high volatility.

Most investors know Korea for its information technology companies and auto industries. But Korea’s big exporters also include materials and industrial goods makers, as well as refiners and shipbuilders.

The nation also has an emerging class of stocks that are making inroads as exporters, including smaller companies that support the auto and information technology businesses, and consumer goods companies.

While these smaller companies may be raising their profiles, the country remains dominated by the chaebols, Korea’s family-run, multi-national conglomerates. The chaebols include Korea’s best-known brand names, such as Samsung , Hyundai , and LG Electronics. That’s unlikely to change anytime soon, but the chaebols are under increasing pressure to become more transparent and accountable, and many already have.

One issue that adds a bit of volatility to South Korea — but not as much as investors might think — is the uncertainty posed by North Korea. The death of Kim Jong-il in December, and the ascension of his son, Kim Jong-un, has thrown North Korea into a new state of flux, and it remains unclear how this will affect its neighbor.

A North Korean soldier stands guard in front of the Unha-3 rocket at Tangachai -ri space center on April 8, 2012.
Pedro Ugarte | AFP |Getty Images
A North Korean soldier stands guard in front of the Unha-3 rocket at Tangachai -ri space center on April 8, 2012.

One of Kim Jong-un's first actions was the provocative launch of a satellite in April, an action many considered a cover for the nation’s attempt to develop a missile that could carry a nuclear warhead. The launch ended in failure, however.

Despite clear threats and uncertainty posted by North Korea, Moody’s Investors Service considers the relationship only a “moderate geopolitical risk” to South Korea, similar to those faced by Israel, Saudi Arabia and Taiwan.

One reason is that North Korea hasn’t launched an attack on South Korea since 1950 — and this is because they don’t have the backing of Russia or China as they did then, says Tom Byrne, senior vice president at Moody’s.

“North Korea would be on its own if it did such a provocative act,” Byrne says. “We do recognize that the leadership transition ... has heightened uncertainty about North Korea’s behavior, about regime behavior and longevity. "No one would be surprised if regime collapsed tomorrow,” he says, but added: “We think these risks are contained.”

The market largely takes these concerns in stride.

“History says whenever markets go down (because of) North Korea that proves to be a buying opportunity,” says Seok Yun, head of research at Samsung Securities.