Posted by Permission of Published, June, 2000 © TheStreet.com

Mixed Forecast for Korea's Investing Climate

By David Kurapka

NEW YORK -- Former U.S. Ambassador to Korea Donald Gregg can't contain his enthusiasm for the country.

Gregg, who now serves as president of the Korea Society, is effusive about his faith in the nation's possibilities. He thinks Korea's economy is poised for a long run of strong growth following an amazing turnaround from 1997's financial crisis. And he thinks the possibility of peace between the communist North and democratic South lays the groundwork for security and prosperity throughout the entire region. Speaking at a road show put on by the Korea Securities Dealers Association, Gregg said he couldn't give investment advice, and then did exactly that. "It's a good place to be," he said.

Apparently, Gregg didn't listen to the conference's other presenters. They painted a much murkier picture, one of an economy that is essentially strong, but with disturbing weaknesses. They described excruciatingly slow restructuring and a highly volatile stock market. Nonetheless, there was considerable agreement among both presenters and participants that the Korean markets would rally this year, around the beginning of the fourth quarter.

That admittedly unscientific sampling of investor sentiment is important because confidence is extremely important to the Korean market. (Sentiment is a key factor in any market, of course, but it is especially crucial in emerging and less-developed markets). Last year, Korea's stock markets -- both the main Kospi stock index and the tech-heavy Kosdaq market -- could do no wrong. Investors viewed the country as having undergone fundamental economic restructuring following the crisis of 1997-1998, which set it on track for a return to strong economic growth. Consequently, the Kospi rose by roughly 50% and the Kosdaq nearly tripled in value.

This year, that confidence has swung the other way. Investors have looked with disappointment on stalled restructurings at some major conglomerates, known as chaebol. That restructuring slowdown is seen by most observers as an obstacle to efficient economic activity. They see a government that has slowed its economic reform efforts because of an election season. They see the near-bankruptcy of the investment trust corporations, institutional investors that have been hit hard by the collapse of the Daewoo chaebol. In addition, the fall in U.S. stock markets has hurt Korea. Thus, the Kospi and Kosdaq have both fallen well off their peaks.

However, election season is over, ITC problems are nearing resolution and U.S. markets appear to have a floor beneath them. For Charles Kim, vice president for Asian equity sales at Flemings, Korea is the place to be in Asia for the next few months. Kim also likes the looks of Taiwan.

U.S. retail investors have a number of ways to play the Korean market as a whole. The Matthews Korea Fund is an open-end single-country fund with a minimum investment requirement of $2,500 and an expense ratio of 1.77%. It is down 24% for the year, but up 13% the last month. There are four closed-end Korea funds: the Fidelity Advisor Fund (FAK:NYSE - news), which is basically flat since the beginning of the year; the Korea Investment Fund (KIF:NYSE - news), up 23% the last month; the Korea Fund (KF:NYSE ADR - news), also up 23%; and the Korea Equity Fund (KEF:NYSE - news), up 26% the last four weeks.

In addition, the iShares MSCI South Korea (EWY:AMEX - news), an exchange-traded fund indexed to the Morgan Stanley Capital International index for the country, trades for a little more than $21 a share, very near its price when it was first offered last month.

Listening to speakers at this conference, a paradox for the Korean market became clear. The companies that are likely to interest investors mostly are the smaller, more entrepreneurial tech companies listed on the Kosdaq. Yet the volatility in that market is immense. It's fueled by enormous online trading, which represents 85% of the trades that occur on the market, and much of that is day trading, according to Nam Park of Hyundai Securities, who spoke at the conference.

"What happens on the Kosdaq is not investing. It's not even speculating," says James Rooney, a governor at the American Chamber of Commerce in Korea. "It is recreational gambling."

Meanwhile, many of the companies on the Kospi still are in the corporate web of chaebols. Nonetheless, there are enormous bargains there. In fact, Rooney sees bargains in the Kosdaq too, although investors have to surf carefully. He's bullish on Korea -- assuming a lot of pieces fall into place, such as the expected profit growth being real, economic reform continuing and the financial system strengthening. "The real economy is solid," he says, "but it is built on a financial system made out of jelly."

The presenters at the conference, Donald Gregg excluded, succeeded in painting a picture of a market that, while bright, has a number of clouds. Like the meteorological legerdemain of The Perfect Storm, it is hard to tell whether the clouds foretell a brief shower or a monstrous hurricane.