Jan. 17, 2003 — Mark Headley will leave for South Korea Saturday to visit corporate executives, and despite political tensions there he’s not nervous about making the trip.

Nor is Headley, who helps run the $189-million Matthews Korea Fund (MAKOX), worried about investing in that country.

Although North Korea’s recent moves to become a nuclear power hurt its southern neighbor’s stocks late last year, they have since recovered and remain attractive, money managers say.

The South Korean market, as measured in U.S. dollars, dropped about 13% in December after North Korea expelled U.N. nuclear inspectors as part of its effort to revive its nuclear weapons program. But the stocks are up 4.5% so far this year.

Domestic investors, who form the backbone of the South Korean market, have been largely unfazed by events over the last two months, observers say. That, they explain, is because the South has been subjected to potential challenges by Pyongyang before and is used to dealing with them.

“North Korea has been threatening to turn Seoul into a sea of fire for 50 years, and nobody in Seoul expects them to do that,” says Headley.

“Virtually anyone who’s been investing in Korea for any length of time has seen at least one of these crises before,” adds Nick Moakes, who oversees Asian investments for Merrill Lynch and helps manage the $110-million Merrill Lynch Dragon Fund/A (MADRX), which has about a third of its assets in South Korea.

The situation today is similar to the nuclear crisis of 1994, which ended peacefully when former President Jimmy Carter helped mediate a resolution. Under an agreement between the U.S. and North Korea, the communist state was required to shut down its nuclear facilities in return for energy and other economic aid.

Short-term selloffs resulting from periodic political strains in the two countries’ relationship tend to be used as buying opportunities by institutional investors, which in turn lifts prices, Moakes says.

Fund managers also believe the risks of war in the Korean peninsula are extremely low. They expect the nuclear problem to be resolved diplomatically.

Observers point out that the loss of life on both sides in a military conflict could be enormous. Guang Yang, who manages institutional and retail international funds at Franklin Templeton, argues, too, that China, a major trading partner of South Korea, would want to prevent a war because it would hurt the Chinese economy.

Portfolio managers say they like South Korean stocks because they are cheap compared to other foreign equities. Overall, the market trades for less than eight times projected 2003 earnings, according to Moakes. “You can buy big-cap, well-run (companies), which are growing in terms of their global importance, and you can buy them on single-digit price-to-earnings multiples,” he says.

Meanwhile, Headley says, the economy of South Korea has been growing even as the economies of countries it depends on as importers have been sluggish or declining. South Korea’s gross domestic product grew at 6% last year, he notes.

“Corporate profitability has been strong and the prospects for economic growth in Korea are much brighter than almost any other part of the world that has a liquid stock market,” says John Chambers, chairman of the sovereign rating committee at Standard & Poor’s, which evaluates South Korea’s credit worthiness.

The country’s credit ratings have risen since they were downgraded in December 1997 because of the Asian financial crisis. Currently, South Korea carries an A+ rating for local currency, and A- for its foreign currency, Chambers says. The ratings have improved because of efforts by South Korean corporations and banks to eliminate debt, he says.

The top stock in Matthews Korea and Merrill Lynch Dragon is Samsung Electronics Co., which makes semiconductors, wireless phones and consumer electronics products. The conglomerate is also a major holding of the $450-million Templeton Global Opportunities Trust/A (TEGOX) that Yang runs.

The managers like the stock because it holds leading positions in its businesses globally. Moakes says he also likes Samsung because it has improved its earnings and free cash flow over the last few years, despite a weak environment for technology companies.

While the South Korean stock market and economy have shrugged off war jitters, they remain vulnerable to other shocks, Headley cautions. For example, the country could be hurt if oil prices remain high or increase because of a U.S. invasion of Iraq.

“It’s not immune from global risk,” but “by and large we’re comfortable” being invested in South Korea, he says