The red-hot tensions on the Korean peninsula have not cooled the exploding South Korean stock market, up 13.1% for the year and subject to furious over-the-counter trading by foreign investors.
According to the International Finance Corp., South Korea's market gained 13.1% in dollar terms through May 27, while the IFC's overall Asian emerging Asian markets index dropped 15.2%.
Interest in South Korea is being spurred by evidence of an improving economy and prospects for sharply higher corporate profits this year that may average about a 30% gain.
But international investors keen to invest in South Korea - despite the political flap to the north - are stymied by legalities. Foreign investors can hold only up to a total of 10% of a South Korean company's stock, a limit already reached for most, if not all, attractive stocks. (Foreigners have an 8% limit on the shares of two stocks, Korea Electric Power Corp. and Pohang Iron & Steel Co. Ltd.)
Once stocks hit that 10% ceiling, foreigners are forced to buy their shares over-the-counter at a higher price than underlying shares trade on the exchange. Typically, the premiums range from 5% to 80% over the exchange-listed price, experts say. Premiums also exist on foreigners' investments in Korean convertible bonds and global depositary receipts as well as Korean shares.
For some time, investors have tried to guess when the government would raise the ceiling to 15%. Many now expect the move later this year or early next year. Some investors believe local stock buyers will rush in ahead of the expansion date to grab shares - and drive up prices - before foreign investors get a chance to expand their holdings.
Calling South Korea a "disincentive because of the premiums," David K. Thomas, senior vice president of Putnam Investments, Boston, said Putnam's Asia Pacific Growth Fund only has about 2% there, "and our general international accounts have nothing in Korea." Instead, Mr. Thomas finds Japan's market to be more alluring, and he expects to raise the fund's Japan exposure to about 60% from 47% now.
Dongho Lee, a manager of Alliance Capital Management's Korean Investment Fund, said he'd "recommend that other investors take a wait-and-see attitude" because of the current political and market problems. Alliance's own fund is fully invested because it's a Korea country fund, he added.
John Bai, a vice president at Baring Securities in New York, cited a number of Korean stocks he likes, including Pohang Iron & Steel Co., Hyundai Motor Co., Samsung Electronics Co., Gold Star Co. and Daewoo Co. But because all are trading at a premium, he suggests investors grab the stocks if their premiums decline; otherwise, they should prepare a list of choice stocks in order to be ready to act when the market opens further to foreign investments.
While most investors seem likely to heed such advice, some also seem eager to act whenever possible. John Lee, manager of Scudder, Stevens and Clark's Korea Fund, is "very positive" on the Korean market because he sees little likelihood of war and doesn't view current tensions as "any more serious than at other times."
Indeed, because some foreigners are selling their Korean shares in reaction to political concerns, "prices are cheaper now, creating a buying opportunity," he said. And Scudder may seize the opportunity. Although the firm's Korea Fund is fully invested, the firm is considering adding Korean stocks to other international portfolios, he said.
Mr. Lee has been "bullish for a while" on the Korean market. He sees a "big surge coming in Korean stock prices in the next couple of years" as corporate profits benefit from improving fundamentals.
Besides economic growth, relatively low interest rates and contained inflation at the moment, Antoine van Agtmael, president of Emerging Markets Investors Corp., Arlington, Va., sees other attractions in South Korea. They include increased trade opportunities, including to nearby, booming China; sizable productivity improvements even as wage increases have cooled; and a weakness in the Korean won compared with the Japanese yen - a boon to Korea because Japan is a leading competitor in the types of products the two produce.
"While the big negative is the political situation, I'm not as concerned as many others are," said Mr. van Agtmael. In its global emerging markets portfolios, the firm had about a 17% weighting in the South Korean market, which was its largest single country exposure. But the firm, which gradually built its positions since September 1992, bought all of its Korean stock holdings before the 10% foreign quotas were filled and thus has not paid premium prices.
Also bullish on South Korea, Wallace Wormley, executive director of London-based PRICOA Investment Management, has 10% of a global portfolio in the country. He said many of his firm's Korean positions were bought before the foreign allocations were used up, he said "many have appreciated handsomely." He'd even buy some stocks at a premium, including adding to his holdings of Korea Mobile Telecom and Hyundai Engineering & Construction Co.
Some observers think North Korea's government is slowly trying to emulate China's way of opening its economy - by first introducing such measures as special economic zones - while keeping its political regime intact.