HONG KONG investors are about to be offered a new range of South Korean funds from management groups. The country's financial markets are being liberalised. There has been strong economic growth and the export-driven economy looks set to benefit from the over-priced Japanese yen. But the sparkle of discovering a new market has been lost for many investors in the wake of sagging regional stock markets and unprecedented turbulence on the world's currency markets. Existing Korean funds have suffered the same dismal fate as most Asian single-country funds over the past 12 months. Baring Korea, generally considered by independent advisers the benchmark fund, is down three per cent over three months and four per cent for the year. Its rival, Jardine Fleming, has lost 17 per cent and 18 per cent over the same periods. But according to John Lee, vice-president of Scudder, Stevens & Clark, the Korean market has many of the attractions of both emerging and developed markets. 'It offers rapid growth and strong earnings. There is also a lot of opportunity among the medium-sized companies because of 700 companies on the stock exchange only about 200 are actively researched.' Mr Lee, whose group has about US$90 billion under management, said the economy had also displayed stability and that its leading companies, such as Sammi Steel, the world's third-largest speciality steel maker, and drug group Korea Green Cross, were global operations. An investor considering Korea must balance the prospects for sustained economic growth with the likelihood of long-term political stability. Mr Lee said: 'This is a great time for the new funds. Foreigners have sold Korean shares, because of what happened in Latin America and to Barings.' He said the premium for buying shares in the market had plunged from about 25 to 30 per cent last year to its present level of between three and four per cent for core-portfolio blue-chip shares. The Korean Government this year is increasing the stake that foreign interests can hold in Korean companies from 12 per cent to 15 per cent. The ceiling will be raised by five per cent next year. Recent economic performance has been impressive, with last year's real gross domestic product (GDP) rising 8.4 per cent and household incomes improving 17.4 per cent. The rising yen could also help the country's exporters by making their products more attractive to foreign buyers. However, a bankers' think-tank has recently warned that the economy is overheating amid mounting inflationary pressure and widening trade deficits. The Korea Institute of Finance last week predicted that the nation's current account deficit for the whole of this year would widen to $6.35 billion, up 33 per cent from last year's $4.77 billion. Choi Gong-pil, a chief researcher at the institute, said: 'If the current pace continues, the nation will suffer a severe economic imbalance.' The institute predicted that the country's GDP would grow 8.1 per cent this year, slightly lower than last year's 8.4 per cent. Other analysts, such as Salomon Brothers, believe it will drop to about 7.5 per cent. The government has said it intends to hold this year's GDP growth down to seven per cent. Mr Choi warned that the economic strain could be worsened by the yen's rapid appreciation against the Korean won, heavy infrastructure spending and the economic liberalisation measures. He said the strong yen helped the country to boost exports, but it also encouraged the influx of capital goods for the expansion of manufacturing facilities. The research warned of stagflation next year if the government failed to take proper measures to stop overheating. Kevin Chan, regional economist for Salomon Brothers, supports the view that the economy could be overheating. He said: 'In the course of 1995, the extensive capital investment undertaken in 1994 should begin to impact on productivity and the competitiveness of exports. 'Given the expected deceleration of the economy, import growth should also remain subdued, although the slowing of the US economy in the second half of 1995 should cap growth in Korean exports.' But Mr Lee believes the economy is displaying its underlying strength. 'The source of growth is from capital investment rather than the consumer side. I do not think that inflation is a real threat or that the economy is overheating at this stage.' South Korea's total external debt stood at $53 billion at the end of last year. This represented a 30.5 per cent annual increase.
