AROUND THE MARKETS Golden decade for South Korea?
 
Philip Bowring IHT
Wednesday, August 28, 2002
If demographics are a major drive of stock values over a 10-year period, as many believe, where are coming bull markets? The optimists in Seoul are setting out a scenario for the South Korean market to enjoy a decade or more of sustained gains. It's a theoretical but credible case.
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Japan has been a victim of its demographics for the past decade. A static work force and aging, risk-averse population have compounded the problems of the collapse of the asset bubble. But the long-term optimists on South Korea look not at Japan's woes but at Japan in the 1970s and 1980s. At that time, the Japanese bull market was regarded as a reflection of favorable underlying trends as Japan shifted from a capital shortage and massive investment in heavy industry to a more consumer and technology driven economy.
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South Korea today is showing similar signs. The Asian crisis taught it the lesson of overinvestment in capital-intensive capacity. Consequent corporate reform and changes in ownership and management structures have reduced the likelihood of repeating the emphasis on size rather than profitability. There has been a shift toward knowledge-based industries in South Korea while labor intensive and some heavy industry has moved offshore.
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One result is reduced demand for capital. In turn this is making it possible for South Korea to enjoy simultaneously a boom in local consumer demand and a sustained lowering of interest rates - 3-year corporate bonds yield only 7 percent. While the consumer boom cannot continue at its recent pace, it does reflect a wider trend. So, too, is the shift from capital intensive manufacturing to services. Manufacturing now accounts for 31 percent of gross domestic product.
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Though savings may continue to fall gradually, they are expected to remain high. The dependency ratio has been low as the birthrate has fallen, but the number of retirees is still small. The coming decade will see the labor force participation at a peak, enabling consumer demand to grow without crimping savings.
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Reduction in corporate leverage and interest rates have already sharply reduced the equity risk that has long inhibited South Korean stock investors. There is a new emphasis on profits and dividends. Pension fund changes will almost certainly lead to much larger flows into stocks and increase the amount of institutionalized savings. Equity-biased foreign funds in the local market is already having an impact on private investment patterns.
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None of this means that South Korea's stock indexes will have straight-line growth. Business cycles have not been abolished, and South Korea remains vulnerable to external shocks. There can be no certainty that corporate de-leveraging will continue and that there will be no repeat of investment excesses. But Seoul's stock market has yet to the achieve the valuations of other developed economies, although its demographics and growth prospects should remain, for the next decade at least, superior to almost all of the rest of the Organization for Economic Cooperation and Development.
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-Philip Bowring (IHT)

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