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One of the biggest stories of the year so far has been the saber rattling coming from North Korea.
The communist nation’s young leader Kim Jong-un has insisted that his nation is at war with South Korea and war is imminent. He has refused diplomatic talks with South Korea and the United States and raised tensions on the peninsula to heights not seen in many years.
All of this has weighed on the South Korean stock market and created what well may be a significant opportunity to find undervalued stocks to buy. The South Korean markets have sold off and are down on the year by about 6% when measured by the iShares South Korean ETF (NYSE: EWY).
The reality is that no matter how much saber rattling is done North Korea isn’t likely to wage war on its Southern brethren. They simply cannot afford it. They don’t have enough fuel and many parts of the country have no electricity and little food.
China may watch the rhetoric with a bemused eye but is unlikely to encourage a war.
There is another reason that North Korea will have to put away its sword and tone down its rhetoric pretty soon.
It is the army that provided the labor for most of the farmers in the nation and it is now planting season. There is not enough manpower to plant and tend to the crops in a nation where all males serve 10 years in the military starting at age 17, so the task has historically fallen to the military.
The planting season starts in May and runs through June for most of the crops grown in North Korea, so rifles will shortly be replaced by shovels if the government wants to provide even meager food rations to its populace.
As the war talk dies down we should see the South Korean markets stage a recovery.
Stocks to Buy as South Korea’s Market Rises
Korea Electric Power Corp. (NYSE ADR: KEP) is the only company is South Korea that is currently engaged in the generation and transmission of electricity.
The company is also expanding into projects outside of Korea and hopes to become one of the largest power generation companies in the world. The South Korean economy has one of the highest projected gross domestic product growth rates in the world and the company should benefit from that over the next several years.
As measured by price to tangible book value Korea Electric is one of the cheapest large cap stocks in the world right now. After several years of losses and operating difficulties the stock trades at just 40% of tangible book value. The company received rate hike approval and the new rates went into effect in January.
The company also has two nuclear power pants back on line and that should reduce costs. The company is expected to turn its first profit in several years in 2013.
The largest Korean company traded in the United States is POSCO (NYSE ADR: PKX). This company is in the steel business and has traded lower on fears that war with its Northern neighbor would shut down production.
As the risk of that actually happening begins to fade investors will begin to focus on the fact the company trades at a 20% discount to its tangible book value and just 10 times earnings. The company is the fourth-largest steel company in the world and has access to the faster growing emerging markets in Asia including China.
Investors seeking a broader approach to buying South Korea might consider the iShares ETF.
The fund holds shares of companies like Samsung and Hyundai that are not easily traded in the United States, as well as POSCO and Korean Electric power. The fund has an average PE ratio of just 9 and trades at just 1.17 times the book value of its portfolio holdings. Shares of the fund should recover quickly when the focus returns to the nation’s solid economic growth prospects and less on the chance of war.
Investing in South Korea is not without some risks. The North could decide that it needs to take the risk of war to gain concessions fuel and food from the west. With no international support it will be a very short war according to most defense experts and any sell off could be treated as an additional buying opportunity by long-term investors.