It is nestled at the junction of superpowers and threatened with destruction by its northern twin. If you only see it on a map and in the news, you would think that South Korea is a dangerous place with an uncertain future. A closer view, however, reveals a strong economy with a bright future.
There are many reasons why South Korea is a strong prospect for investment. The economy of this democratic nation has grown quickly over the past decades (with the glaring exception of 1997-8) With no readily apparent bottlenecks to growth, it still has room for expansion before average incomes approach those of Japan, the U.S. and Europe.
Infrastructure was given a priority in 1988 for the Olympics, and was further improved in order to comfortably co-host the most recent World Cup soccer matches. Almost all forms of infrastructure are now well developed and maintained at high levels. DSL and mobile phone penetration rates are among the highest in the world, and the younger generations of Koreans are extremely well educated and technologically savvy.
Yet, there are of course a number of problems, the simmering conflict with the north being one of them. That said, the situation does not faze the general public and is not causing as much panic as the media in the U.S. suggests. The conflict뭩 only noticeable impact on Korea at present is that there are relatively strict draft laws, and that there are large numbers of U.S. military personnel in the country. This military presence has helped incite some anti-Americanism after a spate of fatal accidents and misbehavior involving U.S. soldiers.
Another factor to consider is that while Korea has a high savings rate, it also has a looming credit card debt problem. There are concerns that any adverse conditions might provoke credit card debt defaults on a large scale.
The financial regulatory climate has improved drastically in the years since 1997. A crisis at that time precipitated IMF involvement in the financial industry and the result has been to remove many obstacles to growth in finance and to provide clarity to the markets. These financial reforms also allowed much greater foreign participation in Korean equity and debt markets. The total stock market capitalization of South Korea is approximately $250 billion at present. This makes it the 20th largest national stock market in the world.
There are two main exchanges ?the Kospi and the Kosdaq. The average daily Kospi turnover is $2.5 billion. The average daily Kosdaq turnover is close to $1 billion. This is a fairly impressive amount relative to total capitalization and is even more impressive when you consider that it is driven far more by retail investors than the market in the United States.
There are currently several foreign owned brokerage firms in Korea. Merrill Lynch, Morgan Stanley, Goldman Sachs, UBS, Citigroup, and many other major international firms maintain offices in Seoul. These firms are primarily focused on international institutional accounts. The retail market is dominated by domestically owned firms ?Samsung Securities, LG Sec-urities, Hyundai Securities, Daewoo and Good Morning/Shinhan Securities.
Most of the names are quite familiar to Americans because they were mainly part of the Chaebol. The Chaebol are Korea뭩 large conglomerates. You may own a Samsung TV or an LG (formerly Lucky Goldstar) VCR, or drive a Hyundai car. Imagine if General Motors had allowed GMAC to become a full service brokerage?It might have worked well. One exception to this Chaebol trend was Good Morning Securities. It developed somewhat independently from the Chaebol, but was taken over by a large Korean bank ?Shinhan Bank. The brokerages offer a wide array of services. However, there is an apparent overcapacity. A substantial part of Korean retail volume is the result of on-line trading. The independent model of stock brokerage does not seem to have a major presence in Korea, but may have a bright future should domestic retail firms finally consolidate.
The costs of doing business in Seoul are similar to those in any major capital city. While real estate is generally expensive, administrative personnel are reliable and less expensive than comparable workers in the U.S. The quality of life is good, but not great. The winters are harsh and there arenâ€™t really any offsetting advantages unless it is your home.
The growth prospects for the economy are excellent as long as war is avoided. Korea is home to several internationally powerful industrial groups which will very likely continue to grow. The country is a strong competitor in semiconductors, cars, steel and electronics. It is dominant in shipbuilding. The investment industry in Korea will almost certainly benefit from the economic growth stemming from these sectors. However, there are several obstacles to a profitable retail brokerage in Korea. The onset of on-line trading is especially advanced in Korea and will continue to pressure commission-based brokerages.
The same factors which fuel the growth â€” an increasingly well educated workforce, reasonable regulation, and technological prowess â€” will also lend strength to domestic brokerage firms and thus make it less likely that foreign brokerages will have any extreme competitive advantages outside of international finance and trading.
There is room for specialized niche players in the market. A venture in Korea is imminently doable, but due to competition there is no reason to expect a standard branch in Korea would achieve a much higher return than a U.S. branch. That is the analysis before the obvious currency risks and the chance of war. There is a great deal of potential for the retail investment industry in Korea, but it will not be tapped by foreign firms unless they bring innovative products and strategies to the Korean market.