Cosmetics is S.Korea's new smart choice

The MSCI Korea Consumer Staples Index, which gets about 40 percent of its weighting from Amorepacific and LG Household, climbed to an all-time high versus the MSCI Korea Index last week.

Earnings growth is fueling the rally. Amorepacific, the nation's largest cosmetics company, reported a 42 percent jump in 2014 net income. The producer of brands such as Etude and Mamonde has risen 158 percent in Seoul trading over the past year, making it the best performing stock in the beauty and personal care sector globally, according to data compiled by Bloomberg Intelligence. LG Household, Korea's second-biggest cosmetics firm, has advanced 75 percent.

The growing importance of cosmetics companies is luring analysts from traditional sectors such as heavy industry, said Yang Ki-in, the head of research at Shinhan Investment in Seoul.

"It used to be that analysts covering heavy industry were the most popular and well paid. But those industries are now losing to Chinese rivals, and we're seeing growth in other sectors like cosmetics that are actually benefiting from China."

Shipbuilders, which former President Park Chung－hee promoted in the 1970s, were the worst-performing stocks on the Kospi last year as orders dwindled. Hyundai Heavy Industries Co, South Korea's fourth-largest company by market capitalization at its peak in April 2011, now ranks 24th after losing about $30 billion in value.

Amorepacific has leapfrogged to 12th place from 48th in 2011 and LG Household is 17th.

The number of Chinese tourists to South Korea last year surged 42 percent to 6.1 million, according to the Korea Tourism Organization. More than 70 percent of the visitors' shopping budget was spent on cosmetics in 2013, Iris Park, the analyst Daiwa hired to cover the sector, wrote in her March 26 initiation report.

South Korean brands are also "better attuned" to the particular demands of Asian consumers than global competitors such as L'Oreal SA, Park wrote, assigning a positive outlook for the industry.

For Oh Sung-sik, chief investment officer for Korean equities at Franklin Templeton Investments in Seoul, cosmetic stocks look overheated.

Amorepacific trades at 58 times reported earnings, while LG Household has a multiple of 37. That compares with 13 for the MSCI Korea gauge. The best performer on the broader Kospi this year is Hankook Cosmetics, which surged 486 percent.

Getting to grips with female beauty products may be a challenge for investors in a country with one of the largest divisions in gender equality.