THE South Korean market produced some of the region's best returns during the third quarter. Improving economic performance means this momentum could be sustained for the remainder of the year. Fidelity Investments has timed the launch of its Korea Fund to coincide with this recent burst of strong performance in a market that can be volatile. The mixed performance is illustrated by the recent experience of investors in specialist Korean funds. According to Micropal, the statistics company, an investor who 12 months ago placed US$1,000 in Citizen Korea, the top performer, would have gained $55. The worst performer, Jupiter Tyndall Korea, lost investors nearly 20 per cent of their capital. But the third-quarter economic turnaround is reflected in the performance of funds during the past six months where an investor with $1,000 in GT Korea, the top performer, has gained $190. Fidelity has experience managing South Korean stocks through a New York listed investment trust and exposure to the market in its regional funds. Edward Bang, the new fund's manager, believes that while the next few months look encouraging, the biggest gains will be secured by those willing to take a long-term position. Mr Bang, who has visited more than half of the country's 705 listed companies, said his search for value was based on identifying the fundamental strengths of companies. His initial portfolio will be overweight in utilities, electronics and consumer stocks, such as retailing. The recent stockmarket surge means that blue chips are at a premium and bargain hunters will need to scour the second-liners for value. Many observers believe the market could be set for a consolidation around current levels. But Mr Bang has confidence in the economic fundamentals and believes investors should take the long-term view. He said: 'The Korean market is very attractive now. Economic growth at nine per cent is the highest in the region after China. However, the economy does not seem to be overheating, and economic growth should return to its sustainable range of seven to eight per cent. 'In addition, inflation remains under control at 4.5 per cent, well below last year's comparable rate of 6.2 per cent. With interest rates falling, the outlook for the Korean market is very positive.' The Korean market is still highly protected against foreign investment, which makes it difficult for the average private investor to build a reasonable exposure. Investment restrictions on foreign holdings were recently lifted from 10 per cent to 15 per cent and could rise to 25 per cent by the first quarter of 1997. During periods of high demand, the price of blue chips can soar on the over-the-counter market. The political stand-off with North Korea is also a potential wild card. Mr Bang believed obstacles could provide opportunities for the more dogged investor. 'Korea is currently priced at 13 times 1995 earnings, one of the lowest valuations in Asia. Historically, Korea has traded in a price/equity range of between 13 and 30 times. 'Overall, we find the current outlook for the Korean market to be very positive.'