Bloomberg View columnist, Mr. Gary Shilling, published an Op-ed piece on January 02, 2014 entitled, “How South Korea Rides Out Emerging-Markets Turmoil”, and in the article, he provides an interesting picture of how the country of South Korea managed to outperform most of its regional competitors including Japan, and China, with robust exports growth. This is despite a strengthening Korean Won currency which was last trading at spot USD/KRW 1,066.40, down approximately 2.0 basis points (bps) as of early Asian trading hours on January 08, 2014. A six-month daily chart going back to July 2013, which shows the depth of the strength of the Korean Won currency, is as follows:
Source: Thomson Reuters MetaStock.com
As readers might notice from the chart, the US Dollar has been on a downtrend mode against the Korean Won currency as shown by the 14-day simple moving average (SMA) line indicated by its purple colour. Although there has been some signs of weakness of the Korean Won currency as we start out 2014, the trend line indicates a strengthening Korean Won currency for the past six months since July 2013. This is despite the various currency volatilities seen during the period which impacted many of the leading Asian emerging economies such as Indonesia, and India.
One of the questions on most readers and investors’ minds could be how did South Korea managed to ride out the various currency turmoil seen in several emerging Asian economies such as Indonesia, India, Thailand, Malaysia, among others? Mr. Shilling pointed out in his Jan 02 Bloomberg article that one of the key factors has been the robust exports growth, which accounted for 58.7 percent of nominal gross domestic product (GDP) in 2012. The expansion in exports helped to propel South Korea as one of the top regional economies with GDP per capita registering at USD 22,600 in 2012. At this level of GDP per capita growth, it is considered to be quite significant, when compared against the BRIC (Brazil, Russia, India, and China) nations, where GDP per capita ranges from USD 1,500 in India to USD 11,300 in Brazil, and some of the G-8 (United States, Canada, United Kingdom, Japan, Italy, Russia, Germany, and France) nations, where GDP per capita ranges from USD 33,000 in Italy to USD 46,700 in Japan, and USD 50,000 in the United States.
Interestingly, the timing of this article coincides with the latest emerging economies research reports published by various sell-side brokerage houses including Goldman Sachs, and JP Morgan, which cited the underperformance of many emerging economies including Indonesia, India, Turkey, China, and South Africa, which Goldman Sachs termed as the “Fragile Five” in its latest research report published recently, and was highlighted in one of the Bloomberg news articles on January 08, 2014. However, despite the bearishness expressed by many analysts on the future of some of the emerging economies, South Korea was not singled out, and was instead favoured by many analysts and market observers. This was from the various opinions I have noted during my observations of the 2014 market predictions expressed during a couple of Bloomberg Television interviews with these market professionals as 2013 closed out, and beginning of 2014.
According to some of the statistics published lately by the South Korean government, GDP growth during the third quarter ending September 2013 showed an increase of 3.3 percent on a year-over-year (yoy) basis, matching the prior year’s quarter. Unemployment rate remains low at 2.9 percent, exports growth at 7.1 percent. Although industrial production growth disappoints with output measured on a year-over-year (yoy) basis showing a negative decline of 1.3 percent, versus a positive 3.3 percent in the previous year, the general upward trajectory of the South Korea economy remains quite intact, and healthy.
With the one year anniversary approaching for the current administration of President Park Guen Hye, the overall performance of the South Korean economy is generally seeing many positive signs of robust growth. However, there are several risk factors to take note including the ongoing tensions with North Korea, slow recovery in Europe, expected slowdowns seen in China, one of its key regional exports market, the competitive devaluation of the Japanese Yen currency, and a tepid US economy, many South Korean businesses have expressed somewhat of a downbeat outlook for the country’s economy citing these factors as major risk issues that could be seen as a test for President Park in her continuing efforts to revive the economy.
Many South Korea companies, including some of its big conglomerates, or chaebols, have shown some improvements in their business prospects as most of the country’s iconic brands like Samsung, Hyundai, among others have received overwhelming popularity around the globe, and have competed quite aggressively in their own respective markets. However, major consumer electronics giants, including Samsung Electronics, has recently outlined a disappointing profit outlook for 2014 in its earnings brief on January 07, 2013, citing the competitive landscape faced by many smartphone makers in an increasingly saturated market. According to excerpts drawn from Bloomberg News, Samsung Electronics is finding itself much harder to market out its average USD 500.00 smartphones, as most of the major market players, including those in China, have priced their smartphones at an average USD 300.00. This could be a challenge for the South Korean economy as Samsung Electronics is one of the major contributors to the overall growth momentum of South Korea for many years. The Company’s smartphones currently accounts for approximately 29.0 percent of world demand in 2012.
Going forward, I believe that the South Korean economy has tremendous growth opportunities ahead. The country is constantly reinventing itself, and has highlighted their strengths in tourism, and its K-pop music, dramas (collectively known as ‘Hallyu’ or Korean culture, and entertainment) as some of the key factors that have helped to compete against other global economies. Despite the various challenges including tensions with North Korea, and the increasingly competitive global landscape, the country remains as one of the top destinations to do business with. The year 2014 will be an interesting year to watch for the South Korean economy as it starts to gradually transition itself out of its emerging economy label to an open and robust economy worth looking at by investors and fund managers alike for potential investment growth opportunities.