South Korea’s economy demonstrates its robustness

South Korea’s industry was boosted by demand for consumer-electronic goods during lockdowns. Its exposure to cyclical industries such as steel and autos should help its recovery this year.

| 3 min read

Last year was a good year for South Korean stocks. The country got through the pandemic with less damage than many, and its strengths in consumer electronics, mobiles and semiconductors helped following a jump in demand for these products during lockdown. This year, the stock market rose well until the end of January, despite the upturn in the virus in December, but then retraced most of its gains.

The South Korean economy only lost around 1 percentage point of its output last year, which it will soon make up. Whilst it is true its success stories in mobiles and semiconductors are unlikely to see the extra boost of additional lockdowns this year, its equity market also has good representation in the cyclical-recovery areas.

South Korea is not only one of the world’s major semiconductor manufacturers but is also a significant steel manufacturer and shipbuilder. It also has an export-oriented car industry. In the fourth quarter of last year, new ship orders recovered sharply from low levels, with more substantial orders for container ships this year so far. Steel output should revive as shipbuilding and construction pick up.

Trade-surplus nation

The country runs a substantial trade surplus based on its exporting skills in its leading industries. The manufacturing PMI has risen to a strong 55.3 in February implying good recovery to come. Inflation has also risen from the lows and is now over 1%. The Bank of Korea has been expanding its balance sheet by buying bonds, although the 10-year yield has recently risen above 2%.

Money growth (M3) was more than 7% last year, keeping banks and markets reasonably liquid. By modern standards the country has a low debt-to-GDP ratio and a budget deficit under reasonable control. The inflation rise is helpful to companies, without being at threatening levels requiring higher rates to dampen an overheating economy.

The Korean index has a large weighting in one company, Samsung, which has good businesses in semiconductors, mobile telephony and consumer electronics. Posco steel, Hyundai cars and Daewoo ships are also important players. The large Korean Chaebols (conglomerates) and multinationals have multiple interests across many business areas. Samsung reported good profits and earnings growth last year, whilst Hyundai was still profitable – but reported falls as the pandemic hit its markets.

Benefiting from tough response

South Korea took early action against the pandemic. It used track-and-trace systems, strict social-distancing rules - and required individuals that had tested positive, or had been in contact with those infected with the virus, to isolate. It repeated its strategy in December and into this year as cases rose again.

Korea is well down the list of global Covid-19 infections, with 15,000 cases per million compared to 89,000 in the US. It has recorded 336 deaths per million compared to the 1,200 to 1,900 range common in the US and much of Europe. However, the virus is still present in the country and the authorities will take further action to keep numbers down.

Overall, the Korean economy looks competently run and well placed to do well this year, with its mix of old and new economy industries. This should be reflected in good profits and earnings growth and could be a good background for investors. In higher-risk portfolios, those seeking exposure to the economic recovery in Asia, South Korea could play its part.

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South Korea’s economy demonstrates its robustness

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