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Easing tensions with the North could boost South Korean markets

With Donald Trump and Kim Jong-un expected to meet for talks, South Korea's Kospi index could benefit

South Korea has been an Asian economic success story. They country’s 51 million people are industrious and well educated and have built a strong manufacturing and technology base in recent decades. With Donald Trump expected to have face-to-face talks with its despotic leader Kim Jong-un could an easing of tension boost the company’s markets?

South Korea has been in the news for the wrong reasons in recent months, plagued by a difficult neighbouring state. The government of South Korea seeks peace and has been ready to talk to its aggressive northern neighbour. It also has to get along with the US, its crucial military ally who remains very concerned about the development of nuclear weapons in the North. Fortunately, as so often before, it appears that the words out of North Korea have been worse than the actions, and tensions are currently reducing a little. South Korea has been arming herself with anti-missile systems from the US which are contentious with China as well as North Korea. To South Korea, they are a necessary defensive measure, there to deter, not to allow a first strike. Close military co-operation with the US is seen somewhat differently by North Korea and China.

Strong fundamentals

Despite the unhelpful political background, the last year has been a good one for the South Korean economy and an even better one for share investors. Share markets have largely ignored the aggressive messages coming from the North, and the colourful responses from President Trump in his tweets. The returns on the South Korean Index have hit a positive 45% over the last year. This reflects the relatively fast pace of growth, at well over 3%, and the ability of the main South Korean companies to increase their turnovers, exports and profits at a lively pace.

The country is well up with other advanced economies, achieving GDP per head in excess of $35,000. The country has a strong manufacturing base, especially in computer chips, consumer electronics and mobile telephones. Exports are around 45% of national output, selling well to China, the USA, Hong Kong, Japan and other countries. The country has been running a balance of payments surplus, and has recently raised interest rates to 1.5% to reflect the good pace of recovery underway.

The South Korean share market has a high proportion of share value in information technology and consumer electronics. Samsung is the largest company, which dominates the Index. Samsung itself has been growing rapidly, with big boosts to turnover and profits in 2017 reflecting its strong presence in a range of important markets. Whilst there has been some decline in Chinese interest in South Korea goods and a drop off in Chinese tourists reflecting the political tensions, business has grown well with the rest of the world. South Korea also exports cars, petrochemicals and ships.

The South Korean shipbuilding industry was badly hit by the banking crash and recession at the end of the last decade which slashed worldwide demand for new vessels. Its recovery has been difficult, given the intensification of Chinese and Japanese competition. Last year the industry did do better with orders, and made some progress with industrial and financial restructuring.

Shares look cheap

The good performance of the share market has not left it looking particularly expensive, thanks to the good growth in profits and dividends that has occurred at the same time. The market is on around 15 times company earnings and provides a 3% dividend yield for the investor in the index of shares. Against a world background of quite high ratings based on the low interest rate environment, this is not demanding, assuming growth continues. South Korea is capable of supplying good quality products to the internet age, and has done well in fashioning US led technology into consumer products that a wide range of global customers wish to buy.

The central bank anticipates continued growth in the economy over 2018. If this is backed up by an easing of political tensions then this could provide impetus to further share gains. South Korea is the fourth-largest economy in Asia, the most dynamic region of the world economy. Its track record demonstrates that it has the capacity to adapt and change as technology moves on and consumer preferences alter.

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