SOUTH Korean stocks are cheap and may rally should the United States economy recover, said Merrill Lynch & Co's global emerging markets equity strategist.

Merrill, which lists the nation as its top pick among Asian emerging markets, has an "overweight" recommendation on South Korea. China's mainland and India, the region's largest emerging markets, are relatively expensive despite declines from records last year, Michael Hartnett, 41, said in an interview with Bloomberg News in Singapore.

"Year to date, Asia has had a perfect storm," said Hartnett, who is based in New York. "It looked pricey to begin with, the US recession became a reality and commodity prices spiked. We like Korea because it's cheap."

Companies in South Korea's Kospi index trade at an average 12 times estimated 2009 earnings, the third-lowest ratio in Asia after the Philippines and Thailand. Foreign investors sold a net US$17.3 billion of South Korean stocks this year, the most among Asian emerging markets that release fund flow information, according to data compiled by Bloomberg News.

The Kospi has fallen 0.6 percent this year, less than the 8.5-percent retreat in the MSCI Emerging Markets Asia Index. China's CSI 300 Index has slid 26 percent while India's Sensitive Index has lost 14 percent.

Mark Mobius, who manages emerging-market equities at Templeton Asset Management Ltd in Singapore, said on May 9 that South Korean stocks should outperform because they are inexpensive. Templeton prefers materials, chemicals and capital goods-related stocks in South Korea and recommends GS Holdings Corp, which operates unlisted GS Caltex, the nation's second-largest oil refiner, Mobius said.

"With foreigners, there's been a real exodus," Hartnett said. "Because Korea and to a certain extent Taiwan (market) were labeled as US plays, as the US situation stabilizes, you're going to start to see Korea and Taiwan discount that."

South Korea's economy is in its 10th year of expansion as shipments to China, Latin America and the Middle East help Hyundai Motor Co and other Korean exporters weather faltering US sales.

US gross domestic product grew at a 0.6-percent annual rate during the six months ended March 31. Economists estimate the expansion will accelerate through the end of December, with full-year GDP growth at 1.3 percent.

Optimistic mood

First-quarter profits that beat estimates at 68 percent of Standard & Poor's 500 Index firms and lower interest rates have eased worries US$342 billion in credit losses will push the US into recession.

"At some stage you have to see a belief that the worst is past so far as the US is concerned, the housing market and the financial sector," Hartnett said. "Maybe not today but I do feel in the next six to nine months we're going to be able to say most of the bad news is priced in here."

The US is the largest market for Asian products. Seoul-based Samsung Electronics Co gets 21 percent of its revenue from the US.

Chinese mainland and Indian stocks may lag behind other regions as raw-materials costs hurt company profits and boost inflation.