The Coming Week in Asia: Election Could Rock Seoul Stocks

TOKYO -- Taiwan has a new president-elect. Japan got a new premier, although a little unexpectedly. Will the leadership also change in South Korea?

Although South Korean President

Kim Dae Jung

still has another three years left in his term, Kim and his

Millennium Democratic Party

are fighting for their political lives, hoping to grab the majority in the National Assembly elections Thursday. Recent polls suggest it'll be a close call between the MDP and their archrival

Grand National Party

. The outcome could cause more volatility in Korean shares over the next few months -- not a very welcome prospect considering the 21% decline the leading

Kospi

index has seen since January.

Much like the rest of Asia, what's at the heart of the issue is the continuation of reforms in the financial and corporate sectors. Even though the Korean economy jumped by 10.7% last year after shrinking 6.7% in 1998, a lot more needs to be done.

Daewoo

, one of Korea's leading conglomerates (also known as

chaebol

), has taken some good steps in breaking up its group by finding foreign investors. Yet Daewoo and other

chaebol

remain heavily indebted. Many Korean bond funds have been hit hard as retail investors, scared they may not get their money back, have funneled their cash into bank accounts. According to the

Bank of Korea

, bond funds dwindled by 111 trillion won ($98 billion) to just under 100 trillion won between June 1999 and March.

Although Kim is credited with helping Korea drag itself out of its 1998 recession by deregulating markets and forcing

chaebol

to get rid of dud loans, many voters don't seem to give a hoot. The outspoken GNP is tapping into national pride by accusing Kim of selling a piece of Korea to foreigners at "dirt cheap prices."

Foreign investors, who have helped markets remain liquid as retail investors step to the sidelines, will likely trickle back to the market if the MDP wins majority. However, some traders suggest short-term volatility is still in the cards since the MDP and GNP generally don't agree on anything. A breakdown in the decision-making process is expected no matter who wins majority.

"Basically, elections tend to exert unhealthy effects over the economy even though they are regarded as an indispensable cost for democracy," noted the

Daewoo Economic Research Institute

in its latest report. Despite the central bank saying otherwise, the report also warns that interest rates may be cut in the near term since inflationary pressures have risen due to the quick spurt in the economy. And as U.S. investors know all too well, a rate cut often dampens stock market sentiment as consumption withers.

Besides election results, one key gauge for future appetite of Korean shares is the expiration of some 200 funds at

Hyundai Investment Trust Management

by May. Hyundai, one of the largest mutual fund firms in Korea, says it manages about 700 funds worth about 11.5 billion won. Although it won't disclose how much they expect in total redemptions, a

Reuters

report said about 800 billion won worth were seen in March.

If investors aren't feeling comfortable with the political scene, it won't be just Hyundai fund managers dumping shares. It will turn the heat on online daytraders, who sometimes drum up to 40% of total market volume, as margins are called.

If you have the stomach to ride out Korea's short-term bumpy ride, analyst Seung-Hoon Lee at

Warburg Dillon Read

says it's best to look for companies that will produce profits from global trade. That means avoiding Internet and financial stocks for the time being and picking up things like

Hyundai Electronics Industries

and

Korea Telecom

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.

Most of all, Lee loves

Samsung Electronics

. Shares are up about 20% since January because profits are expected to rise over the long-term from products like semiconductors and telecom equipment. That love is shared by Asia Pacific funds that have made hay on Samsung's gains, such as

(FAASX) - Get Free Report

Flag Investors Top 50 Asia, up 99.7% over the past year, and the

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59 Wall Street Pacific Basin, up 74.8%.

Lee also says he's hoping some of the money that spilled out of bond funds will find its way to stocks in the latter half of 2000. He expects reform of Korea's

chaebol

to continue, regardless of election results. "Bear in mind that past reforms have relied on presidential leadership, not political party leadership. I expect President Kim to spearhead the post-election restructuring mandate," he says.