Before we review individual Korean securities, it may be well to consider briefly the economic factors involved. I will not attempt a comprehensive survey of a subject that has been investigated at such length, but I will confine myself to certain elements that are relevant to our goal. The four problems which concern the investor most immediately are: (1) the general price level, (2) corporate profits, (3) interest rates and (4) security price movements. Let us consider the historical record of each of these in turn.

1. General Price Level. The movements of producer and consumer prices from 1962 through 2008 are set forth below:

Source: Bank of Korea

Two distinct periods are evident from the data: first, the rapid inflation from 1962 to 1981—a normal concomitant of money supply expansion; and second, the more moderate advance beginning in 1982. These long-term price movements have imparted an inflationary bias to expectations. In fact inflation, continued at its current rate, would eat up more than half of the income now obtainable from high grade corporate bonds. The next question, naturally, is whether stocks can offset a loss of the Won’s purchasing power with advances in their dividends and prices. Experience has shown that businesses retain some of their earnings for later use, and this grants common stocks the compounding effect not present with bonds.

2. Corporate Profits. The last 50 years have been characterized by an extraordinarily rapid advance in the aggregate earnings of Korean businesses. But while the dollar amount earned is important in appraising performance, it is not the best measure of profitability. Dollar earnings should also be considered in relation to the amount of capital necessary to their production—or more specifically the equity required (from the stockholder’s perspective). The chart below sets forth various performance metrics of Korean enterprise from 2003-2008. There are obvious weaknesses in analyzing such short-term data, but the period encompasses nearly a full business cycle. It appears that Korean businesses are more profitable than average.

Reductions in the corporate income tax rate—from 25 percent in 2008, to 22 percent in 2009, to 20 percent in 2010—should increase business earnings on the whole.

3. Interest Rates. The comparative yields of Korean Treasury bonds, AA- corporate bonds and BBB- corporate bonds are shown below:

4. Security Prices. The Korean capital market has failed to grow at a rate commensurate with the real economy.

Source: KRX

Additional information can be found here: http://www.keia.org/economy.php