Rachel Hui has traveled from Hong Kong to South Korea twice this year, splurging on items such as high-end facial creams and popular fashion goods by some of the country’s most popular brands.
The products are cheaper, and there are fewer “fake goods,” says Ms. Hui, a 33-year-old university education specialist, who often takes friends along with her. On her last two trips to Seoul—in January and July—she spent about US$2,200.
That type of buying by tourists and locals is boosting the sales of producers of cosmetics and other consumer goods, and sending their stocks soaring. It is providing a rare bright spot for the country’s equity market, which is down 3.6% this year and ranks as the region’s worst, dragged lower by heavyweights such as technology giant Samsung Electronics Co. and auto maker Hyundai Motor Co. which have lost favor as their sales slow.
One of South Korea’s top performing consumer stocks is the country’s largest cosmetic firm, Amorepacific Corp., up 127% this year. Shares of Hotel Shilla Co. Ltd., a duty-free shop operator which sells beauty products, have added 45% and personal-care and cosmetics producer LG Household & Health Care Ltd., has rallied 16%. LG Household, South Korea’s second largest cosmetics firm, had expressed interest in buying Elizabeth Arden Inc. this year.
Other South Korean firms with brands aimed at young consumers, selling everything from clothing to packaged ramen and snacks, have also seen their stocks run up in recent years.
“In the past, it was tech and it still is,” says Arthur Kwong, head of Asia Pacific equities at BNP Paribas Investment Partners, which manages US$636 billion globally. But for investors in Korea, “this is something new.”
Mr. Kwong says the firm bought stocks of South Korean firms that he says are establishing brand loyalty and have the potential to gain market share in the region.
The interest from investors comes on the back of the growing popularity of South Korean pop culture—known as the “Korea wave”—that has seen Asians obsess at times over various music videos and the cultural products associated with them.
One of the most notable pop-music hits was Psy’s “Gangnam Style” music video, which went viral on YouTube in 2012. The country’s TV dramas have been a big part of the country’s cultural exports too. One popular sitcom—“My Love From the Star”—has actress Jun Ji-hyun frequently promoting products, leading to fans rushing out to buy goods including lipstick, shoes, fried chicken and beer. Hong Kong’s Ms. Hui says she bought a three-piece facial set, by Amorepacific’s Hanyul brand, after discovering it was featured on the show.
Chinese visitors to South Korea spent about $7.5 billion last year, doubling the spend from three years earlier. HSBC Holdings PLC estimates that South Korea’s cosmetics exports are growing at an annual pace of about 60%.
Fund managers betting on the growth of South Korean brands have been careful, however. Companies across the world are racing to roll out products tailored to Asian tastes. And in other sectors, South Korean sales abroad are already slowing, notably in smartphones where China’s Xiaomi Inc. is challenging Samsung by offering cheaper alternatives.
For products that rely heavily on branding, Christopher Darling, Asia chief investment officer at LGM Investments, asks: “Is it a one-hit wonder or something more sustainable?”
Mr. Darling says LGM, which manages $2.8 billion, hasn’t bet on the rise of South Korean beauty brands but has bought shares of South Korea’s leading tobacco maker, KT&G Corp. Shares have rallied 26% this year as the firm expanded sales in the region, including Southeast Asia.
Investors and analysts point out that stocks of South Korean firms with growing brand names are expensive.
“We’re at the peak of excitement” from investors, says Shaun Cochran, head of Korea research at CLSA Ltd. But “we’re much closer to the end than the beginning.” Amorepacific Corp.’s stock is already more expensive than that of Shiseido Co. Ltd. and Kao Corp., two Japanese cosmetics makers that command even larger shares of Asian cosmetics sales.
Still, investors such as Joohee An, who runs an Asia stock fund for Mirae Asset Global Investments Co., says she’s holding on to her top three picks in Korea—Amorepacific, Hotel Shilla and Korean snacks maker Orion Corp.—convinced their growth will continue to push up share prices.
Amorepacific has been “very creative and innovative” and flexible when expanding in newer markets, says Ms. An, who first bought the stock in 2010 but built the majority of her position this year.
The company’s profit surged nearly 70% in the second quarter, fueled by a roughly threefold increase of cosmetics sales in China—about a quarter of its second-quarter cosmetic sales came from Chinese clients.
Ms. Hui, who began using beauty products from South Korea three years ago, says she’s not wedded to them. She used Japan’s Shiseido products as a teenager but switched after hearing rumors about contamination in Japanese cosmetics—despite the Japanese government’s efforts to reassure consumers—from a series of disasters including a nuclear accident.
She says Korean products can be heavier and oilier than she needs in Hong Kong, where the climate is hot and humid. And with the Korean won strengthening against the Japanese yen, she says it makes less sense to go to Korea for her purchases.
Still, her favorites include a handful of South Korean names: a shower gel by Innisfree, body wash by Illi, and serum and toner by Hanyul. “I like to try different products and they keep rolling out new ones,” she says.