Six of won, a half-dozen of the other

by Briton L. Ryle

Judging from recent coverage in the popular media, China’s pretty much dropped off the map. Same with South Korea. Obsessed with the U.S. economy, investors are missing a sizable bull run in Seoul.

Perhaps I should say they already missed it.

The KOSPI’s up 50% from September lows. South Korea’s economy is expected to grow 5% this year. Foreign investment is up, and consumer spending is high. Bad debt held by banks is at record lows, which means the restructuring of the financial sector in the wake of the financial crisis 5 years ago is progressing smoothly.

All of this is favorable to continued economic growth. But there’s evidence that South Korea’s stock markets have come too far, too fast. The economists at Morgan Stanley believe that consumers have taken on too much debt, creating bubbles in real estate and stocks.

Plus, there’s been a jump in wholesale prices recently, especially agricultural products. Inflation is the last thing South Korea needs.

Now, it’s not like South Korea is in danger of seeing the kind of rampant inflation that helped bring down its economy. But even a little inflation could slow spending enough to put 5% growth out of reach. And a GDP slowdown will make stock prices look even higher than they are right now. In other words, chances are good that South Korea’s stock markets are at their highs for the year.

This is why I recently advised selling half your position in Hanaro Telecom (HANA:NASDAQ). By selling half your position, you’re essentially playing with the house’s money. Hanaro still represents a value in the telecom space. But it is a telecom. And the negative stigma surrounding telecoms will continue to weigh on Hanaro’s price.

The year of the horse

I’m beginning to wonder about this astrology stuff. I started the year very bullish on the Chinese economy. But so far, my expectations have gone unfulfilled.

In Chinese astrology, 2002 is the Year of the Horse. The best fortune-cookie advice for people born in the horse years is to be cautious in 2002, especially when it comes to financial matters.

Hmmm… that sounds an awful lot like what I see going on in China.

With so much uncertainty in the world, investors shun risk in favor of safe investments. In other words, the rally in U.S. stocks since September came at the expense of riskier economies, like China’s. And if my economic (and bakery) sources can be believed, this trend could continue for several months.

Which is actually not such a bad thing. Despite China’s stock markets being down for the year, only one of my recommendations from Taipan’s 2002 Forecast Issue is down more than 10%—Brilliance China (CBA:NYSE). And that should soon change.

Sedan sales hit a record in 2001. And early signs are that 2002 will be even better. But the immediate catalyst for Brilliance is the joint venture with BMW. This deal should be approved in March. I don’t expect the stock to trade lower than US$17.50 between now and then. Once it gets the green light, I expect Brilliance to move above US$20 in short order.