The Kospi Might Have Finished Its Drop-sy - TheStreet

Is the Korean stock market finally poised for a rebound?

That is the 1 million

won

question these days. Since the beginning of the year, the benchmark stock index, the

Kospi

, has dropped 25%, and the more volatile, tech-heavy

Kosdaq

has dropped 33%.

Such a steep drop has been somewhat surprising, considering the overall strength of the Korean economy -- it posted 10%

GDP

growth last year with 6% expected this year -- and has racked up a pretty good record of economic reform in the wake of the financial crisis of 1997 and 1998.

The latest tumble was triggered by last Thursday's National Assembly elections, a defeat for the ruling party that clouds the political situation for the near term. The Kospi fell 15.4% over the next two trading days.

Not surprisingly, U.S. investors playing the Korean market have taken a beating the last few months. Internet service provider

Korea Thrunet

(KOREA)

has plunged 75% since December while

South Korea Telecom

(SKM) - Get Report

is down 28% since the beginning of March.

The four closed-end Korea funds each have dropped as well: the

Fidelity Advisor Fund

(FAK)

is down 28% since February; the

Korea Equity Fund

(KEF)

is down 27% since January, as is the

Korea Fund

(KF) - Get Report

; and the

Korean Investment Fund

(KIF)

is down 23%.

Finally, the Kospi rebounded on Tuesday, climbing 5.6%. It was the highest increase in Asia on a day when most markets in the region were up following Monday's rally in the U.S. Many investors seemed to have come to the conclusion that a rally is around the corner.

"I think we are near the bottom," says Mark Headley, portfolio manager of the

(MAKOX) - Get Report

Matthews Korea Fund. He's ready for the market to rebound. His fund has dropped 27% so far this year, although it is still up 6% over the last 12 months. He sees tremendous bargains in Korea, especially in the financial sector. "The valuations are extremely attractive," he says. "Banks are trading at 3 or 4 times earnings for 2001." He particularly likes

Hana

and

Shinhan

, both of which have dropped considerably over the last year as investors have feverishly bought tech.

Now for the bad news. As I wrote a

few weeks ago, foreign investors had been avoiding Korea prior to the elections. They may continue to do so for a while, at least, waiting for a sign that the government is restarting its economic reforms, which had stalled during the campaign leading up to the National Assembly election. Potential gridlock now puts those reforms in doubt. And the government may decide to raise interest rates to slow the economy.

In addition, Korean investors have to decide it's time to buy on the dip, something they have been loath to do so far, says Headley. After the crisis in '97 and '98, many investors are now overly cautious.

"Asians have been quick to run for cover after the last few years," he says. "They don't see

the current market as a buying opportunity." They are also nervous about the drop in U.S. markets.

Nevertheless, odds are improving that the market will go up over the next few months. Among investment advisers, Korea has not been high on the list of promising emerging markets for a while. Maybe it is time it should be.

In keeping with TSC's editorial policy, David Kurapka does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

dkurapka@thestreet.com.