The Odds Favor Investors Who Bet on Korea
Is Korea a buy? A lot of people think so. They are clamoring to invest in a country where students are in the streets throwing stones at policemen and President Chun Doo Hwan has been pressured into holding talks with his political opposition. The result of those talks will be either compromise and political reform or further disorder and bloodshed if the military is ordered to quell the student protests.
Are the investors foolhardy to gamble on a good outcome for Korea? Not really. The odds favor compromise because both Chun and his opposition know the honored place demonstrating students have in Korean history. They took to the streets against Japan’s colonial rule in 1929--a fight they lost--and against President Syngman Rhee’s corrupt government in 1960--a fight they won, forcing Rhee to step down and bringing about political reform.
This time the students have been joined by their middle-class parents in demands for democratic reforms and broader participation in next year’s presidential election when Chun leaves office. Most important from the investors’ point of view, there is no argument over economic goals: Both the party in power and the opposition want Korea to continue its rapid growth.
Output Skyrockets
Korea is at the stage of economic development where its industrial labor force--roughly 16 million of Korea’s 41 million people--is growing rapidly as people leave the land and go into the factories. A country benefits from that because output skyrockets when people leave subsistence farming and begin producing goods for the whole economy.
On the other hand, a country is challenged to keep on growing rapidly to provide jobs for the streams of youngsters now demanding work. Korea’s economy has been absorbing 500,000 new workers each year--proportionately more than any country in the world--by growing 7% a year in this decade.
That’s with a lot of help from the United States, which takes about $15 billion of Korea’s $30 billion in exports, adding to the U.S. trade deficit and leading to criticism in Congress about Korea’s low wages.
The fact is that Korea’s wages ($1.60 per hour), while low by Japanese and U.S. standards, are not low by the standards of developing countries. And Korea’s industrial wages have been growing 5% a year in real terms as economic growth has increased the country’s wealth. Korea’s gross domestic product per person, at more than $2,140, is now higher than that of Brazil, Argentina or Mexico and gaining on that of some European countries.
But Korea is a hard economy to invest in. The Seoul government, fearing dependence on too much foreign money (former colonial ruler Japan is a big investor) tightly controls access.
Few Avenues
There are only a few ways for individuals to invest, and all are relatively high-priced. Largest and best known is the Korea Fund, an investment company whose shares trade on the New York Stock Exchange. The fund has assets of roughly $200 million invested in the Korean economy. But at $62 a share, the fund’s market value is almost twice the value of those assets. Which means that for every dollar you pay for a Korea Fund share, you get about half a dollar working in the Korean economy. The rest is the premium caused by investors bidding up Korea Fund’s price.
And the other available Korean investments sell at premiums also. They consist of the Korea Europe Fund, which trades in London, and three issues of convertible bonds of Korean companies--Samsung Electronics, Daewoo Heavy Industry and Yukong Oil. They trade in London, too, as do five mutual funds--named Korea Trusts and Seoul Trusts. But trade is a misnomer because the trusts are very hard to get.
“People buy them and salt them away,” explains Myrick Hatch, vice president of the Korea Fund in New York. The hoarding investors are counting on growth in the economy and on appreciation in the Korean currency, the won, which is now around 812 to $1 and has risen 6% so far this year.
What do Korea Fund and the trusts invest in? In the 300 or so companies listed on the Seoul stock exchange--such as Hyundai Motor, which has had such a successful beginning in the U.S. car market; in Gold Star Co., which makes VCRs, and in Daewoo group, which makes the Pontiac LeMans and Caterpillar tractor parts.
And in the newcomers, such as Young Chang Akki Ltd., a manufacturer of pianos. Young Chang is a good example of how things happen in Korea today. It started out working under a license from Yamaha, the Japanese musical instrument maker, but then developed its own instruments. Now Young Chang has become one of the world’s leading piano makers, and is giving Yamaha competitive fits.
Political strife, although dangerous, is not uncommon in a rapidly developing country. If it is followed by political reform, the economy will only become stronger.
