South Korea: model for reform

Sixteen months after global financial turmoil blindsided its economy, South Korea has transformed itself into a poster child for economic renewal.

Fund managers and emerging-market analysts say that among East Asia's troubled economies, Seoul has moved quickest and deepest in breaking up the corrupt links between business and government, welcoming foreign buyers of domestic firms, and shaking up and newly regulating the banking system.

South Korea's resulting rebound has taken many analysts by surprise. The International Monetary Fund in February issued a remarkable revision of its outlook for the economy's growth this year. In December, it said the nation's output would decline 1 percent this year. Now it is predicting growth of 2 percent.

"We are extremely excited about Korea," says Mark Headley, a portfolio manager for Matthews International Capital Management in San Francisco. "It's our top choice."

Fund managers recommend such stocks as Samsung, the maker of semiconductors and other electronics; Pohang Iron & Steel Co. (ticker: PKX), one of the world's biggest steelmakers; and Korea Electric Power Corp. (ticker: KEP), the country's top power producer.

Among East Asian markets, "South Korea is our favorite of the whole lot," says Joshua Feuerman, manager of the Emerging Markets Fund at State Street Global Advisors in Boston.

Still, the timing for a revival by South Korea and most of its troubled neighbors depends to a big extent on Japan.

For example, the Seoul stock market moves closely with the value of the dollar compared to the yen. (A falling yen makes Japan more competitive against South Korea in overseas markets.) Should Tokyo continue trying to revive its economy by pumping up liquidity, the yen would probably fall and put downward pressure on Korean stocks, analysts say.

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