Korea: Case Study in Risk - and Reward?

South Korea epitomizes both the risks and potential rewards of single-country investing.

The Seoul stock market plunged 26 percent last year, as exports for this trade-dependent nation slumped.

The market also reeled in the face of scandals: blue-chip bankruptcies, high-level corruption, and banking problems.

Add to that some of the bitterest labor strife in the world plus North Korea, with its famine, volatile politics, and 1-million-man military.

The result is sharply negative returns for Korea funds (see chart above). That said, some Korean stocks offer unrivaled value.

"We like South Korea because the valuation factors ... look very attractive," says Leila Heckman, managing director of Smith Barney's global asset allocation group. She points to low P-E ratios - share prices divided by earnings per share - and low prices relative to the book value, which means the share price is less than a company's value on paper.

"You have companies like Korea Mobile Telecom, probably the best growth telecom stocks trading at probably the lowest valuation in the world," says Rama Krishna, portfolio manager of the Korean Investment Fund.

Other factors smile on Korea. Currency trends and the stabilized price for semiconductors and other products now favor exporters.

Also, interest rates are falling, and the government plans to allow more foreign investors into the South Korean stock market.

"I think the worst is over," says John Lee, manager of the Korea Fund, a closed-end mutual fund issued by Scudder, Stevens & Clark.

"But the market will be quite volatile as positive sentiment returns, especially if there are more bankruptcies," says Mr. Lee. He sees the major market index more than doubling within three years.