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South Korea – Going for gold?

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

South Korea’s economy is expected to benefit from hosting the Winter Olympics, and may provide opportunities for investors.

Click to toggle accordion What you’ll learn:

How the Winter Olympics may boost the economy.

What the economic outlook is for South Korea.

How to invest in this emerging economy.

South Korea is hosting the 2018 Winter Olympics from 9 February, placing the country in the global spotlight.

The event will serve as a reminder to investors of South Korea’s economic success, despite it being rocked by corporate scandals last year.

The country last hosted the summer Olympic Games in Seoul in 1988, and was co-host for the 2002 football World Cup, and the government hopes that the Pyeongchang 2018 Winter Olympics will again showcase South Korea and boost economic growth.

According to the Hyundai Research Institute, which provides consulting and economy-related research, the two-week event may help provide an economic boost of around $60bn for South Korea over the next 10 years.1 This will be partly as a result of new infrastructure being put in place for the games, including highways and direct train lines from the international airport to Pyeongchang, as well as demonstrating the country’s technological prowess, with Intel bringing its 5G mobile trial platform to Winter Olympic venues.

Investors in South Korea have reaped the benefits of the country’s success in recent years, although of course past performance should never be seen as a guide to future performance. The benchmark Kospi index rose to near record highs in 2017, with Samsung, the market’s biggest stock, driving a large proportion of gains.2 The index’s performance made South Korea one of Asia’s best-performing markets last year, also aided by other tech shares such as SK Hynix, and LG Electronics.

However, the Index saw its biggest intraday percentage drop since Brexit last week, following big losses in US stock markets.3

The country is not without challenges, not least political tensions over neighbouring North Korea, and recent corporate scandals. For example, Lee Jae-yong, head of Samsung, was last summer sentenced to five years in prison after being found guilty of bribing the South Korean government. Park Geun-hye, the country’s first female president was impeached over the corruption scandal. Remember that all investments can fall as well as rise. Past performance isn’t a guide to future performance, and you might get back less than you invested, particularly bearing in mind that emerging markets are typically riskier than developed ones.

The outlook for South Korea

Unlike some of its emerging market peers, Korea isn’t particularly rich in natural resources. However, it has managed to secure economic growth through its young, dynamic and ambitious workforce, leading the country to become a leader within the technology sector in particular.

The country’s capital, Seoul, is well-known for being technologically-advanced, with free Wi-Fi available in most of the city. Its advances have propelled South Korea to place it as Asia’s fourth-largest economy, with a population who are as rich as the French, with GDP per head of around of around $30,000.4

A large proportion of the South Korean stock market’s growth can be attributed to tech giant Samsung Electronics, which accounts for around a fifth of the country’s exports. Yet while the company is known as a smartphone giant, it’s also involved in many other areas, such as shipbuilding, credit cards, and engineering.

Other high profile South Korean companies include LG and Hyundai, which are also widely diversified, rather than just focused on the electronics and car market. For example, Hyundai manages department stores and hotels as well as manufacturing cars.

The on-going pick up in global trade is set to benefit South Korean exports, and saw Samsung post record-breaking earnings last year, despite the scandal surrounding the group’s previous leader, Lee Jae-yong.5 Meanwhile, LG is also popular with investors, seeing its share price soar last year as it became the most heavily bought stock by foreign investors among major Korean companies.6

However, there are potential political headwinds facing the South Korean stock market. Tensions over North Korea following recent nuclear tests rattled markets, and whilst they may have bounced back, fears over what may lie ahead remain. The North’s sixth nuclear test in September prompted France to raise some concerns about sending athletes to the Winter Olympics, while the British team has announced that it has evacuation plans in place should political tensions escalate.7

According to economic research consultancy Capital Economics, another issue that could potentially hinder economic growth is a high level of household debt. However, an expected 16% increase in the minimum wage in 2018 is expected to boost consumer spending.8

The risks and how to gain exposure

South Korea could prove a potentially successful long-term investment as part of a diversified portfolio. However, there are no guarantees, and there is always the chance investors could get back less than they put in. There are a number of political and economic risks that could pose a threat to South Korea, going forwards, with tensions over North Korea and the potential for corporate scandals.

Developing countries such as South Korea also often have weaker standards of corporate governance, and rules to protect investors, compared to countries such as the US and UK. Any investment in this region should be considered a long-term investment, as part of a diversified portfolio that includes funds invested in other geographical areas.

Remember that there’s also currency risk to consider when investing overseas, with gains that could potentially be offset by a fall in the value of the particular country’s currency against the pound. However, of course, the opposite is also true, so if the foreign currency strengthens, this may boost returns.

For investors seeking to gain exposure to South Korea, there are several options. One is the iShares MSCI Korea UCITS exchange-traded fund (ETF) which tracks the MSCI Korea Index. Alternatively, investors could spread risk with a regional fund that invests in a wide range of holdings within Asia, including South Korea, such as the JPM Asia Growth fund, which includes Samsung among its holdings.

Please bear in mind that our mentioning these investments does not constitute a recommendation. If you are unsure about which investments to choose, you should seek professional financial advice.