Standard Chartered Bank plc (STAN.l) bought today, subject to various approvals, 100% of Korea First Bank (KFB) for £1.8 / $3.4 billion, cash. The deal means KFB will represent 16% of Standard Chartered's revenues and 22% of its assets. Further details here from Bloomberg.

Boiled down, this deal is ultimately a big, bold, company-transforming bet on Korea. Is the country worth it?

It would be fair to describe the actual Korean economy as not hot. Consumer confidence is at a four-year low; the export economy is under threat from a weakening $US; domestic demand is languishing on the back of a burst consumer credit-card bubble 2 years ago; house prices are falling creating problems of negative equity; and the yield curve at the short end (1 year) is inverted, not encouraging a revival of limpid corporate investment.

On the other hand, exports are still strong; there have been fiscal surpluses since 2000; the country is a net creditor; the main credit-raters (S&P, Moody's & Fitch) regard the nation as investment grade - even with that problem neighbour; the complete yield curve is positive; and the banking sector has undergone beneficial restructural reforms since the Asian Crisis of 1997. The Korean Composite Stock Price Index (KOSPI) reflected these data, and their future promise, with a 10.5% rise in 2004.

But emerging economies are about more than numbers. Their political and social structures carry a weight in investment decisions that has long-since been shed by more mature and stable industrialised democracies.

Korea is democratic - vigourously so. And many of the social and political gains that marked other nations' emergence from industrialisation have been equally hard-won there. Moody's have been quoted as citing social welfare costs as a potential "drag" on gross domestic product growth. Maybe, but this ongoing societal investment is part of what makes Korea one of the most compelling of the emerging economies: political and social gains have investment value too.

Bottom line? Korea is a seriously appealing investment - geopolitical and near-term economic warts and all. In that light, Standard Chartered's gamble looks a great one.

RJH has no shares in Standard Chartered Bank plc, but has admired them for some time, in spite of their current creditor exposure to the wounded CAO .

Main research sources: asianbondsonline.adb.org website;Yahoo finance; DJ newswire

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