Kang Mijung, director of equities at HSBC Halbis Partners, says she remains bullish on Korea despite the recent re-emergence of the "Korea discount".

The discount û which in recent years has resulted in a relatively low valuation of South Korean shares versus their Asian peers û has reappeared since the turn of the year. However Kang says this has been largely down to excessive expectations on the back of the market's 54% rise over the course of 2005.

Kang says: "The performance of the MSCI Korea Index last year was exceptional. This year Korea has become the biggest laggard in the region, with consensus estimates pointing to an annual 7% rise. But what that has done is made valuations attractive again û especially against other regional markets."

She says Korea is now one of the cheapest markets in the region, with the current MSCI Korea PE of 10.4x offering a 10% discount to the 10-year average PE since 2000. It also offers a 17% discount to the region, with the MSCI Asia ex-Japan currently standing at 12.5x.

"There has been a downgrading of earnings estimates this year and that has introduced an element of realism. That has left us with a fairly decent risk-reward trade," she says.

The major risk, she says, remains the continued strength of the Korean won against the US dollar.

"With the reliance of the Korean economy on exports, clearly the forex situation is going to be an issue. Korea is a globally-focused economy, but the world is becoming a lot more competitive, and Korea is no longer always the lowest-cost producer," she says, pointing out that HSBC Investment's Korean Equity fund is therefore focused on stocks with exposure to domestic demand.

"IT, financials and consumer-type stocks all provide long-term potential with an element of insulation from world trends," she says, adding that domestic demand is rising on the back of a growth in the 35-to-45 age group who are at the peak of their earning cycle.

Korean companies, she says, are also adapting to the changing cost front while investing heavily on value-added research and development.

The fundamentals of the market also remain strong she says, with inflation coming in well below the 3.5% target, and interest rates showing no signs of being raised significantly in the near-future. On top of that, GDP growth for the first quarter recently came in at 6%.

"I expect that to drop back to nearer 3% to 3.5%, but for a country the size of Korea that remains exceptionally healthy," she says. "I donÆt expect the Korean market to reach a premium to its peer group, but even if it reached the regional average from where it is now, that would still be 20% upside."