Mark Mobius, the emerging markets guru who manages nearly $400 million for Templeton, says South Korea — both its stocks and its currency — are undervalued.

Over the past 12 months, his Templeton Emerging Markets Fund has delivered a 23 percent return, compared to a 19 percent gain in the benchmark MSCI Emerging Markets Index.

“Korean stocks are cheaper than the average emerging markets,” Mark Mobius told an audience in Seoul recently. “The currency is somewhat undervalued.”

South Korea's currency, the won, has fallen by 12 percent since the beginning of the year. It has been the world's worst performing major currency in 2008.

During that time, the euro has risen by more than 5 percent, the yen has gone up by more than 8 percent, and the yuan has appreciated 4 percent against the U.S. dollar.

Mobius thinks the Korean won is now undervalued by about 8 percent, which could lead to big gains for currency traders.

Korean stocks, measured by the Kospi index, are down by 3.9 percent this year. They trade at a price-to-earnings ratio of 13, slightly less than the ratio of 15 for its peers in the MSCI Asia Pacific Index.

“Since 1997, Korea has actually outperformed emerging markets in general and I think that is going to continue, especially as a result of the kind of reforms that the government is instituting now,” Mobius says.

Specific investments Mobius likes include materials, chemicals and capital goods stocks in South Korea. Some trade in New York as American Depositary Receipts or through exchange-traded funds.

“One trend in Korea that is giving us more confidence is the trend of (companies) moving away from chaebol structure to holding company structures,” Mobius says. “This will give more confidence to investors as it boosts transparency in the market.”

“The chaebol discount will disappear,” he says.

Another factor that is important to the growth of Korea’s economy is the Indian market, he says.

“India has 1 billion people. Its per capita income is moving up. Those who get into India will reap benefits, and Korean companies are well placed to work with India,” he says.

The legendary stock picker may be alone in his optimistic assessment for South Korea. The country’s central bank recently announced that it will lower its estimates for economic growth.

Additionally, the bank wants a weaker currency, which it believes will help boost exports.

“Economic growth seems to be slowing significantly,'' Bank of Korea Governor Lee Seong Tae told an audience in Seoul on the day Mobius spoke.

“It seems rising oil, food and other commodity prices, coupled with a U.S. economic slowdown, are gradually affecting the domestic economy. The trend of slowing growth would continue.”

Another concern of the South Korean government is inflation. Producer prices rose 9.7 percent over the past year, the fastest pace in more than nine years.

Inflation could prevent the central bankers from cutting interest rates, despite trader expectations that further cuts are certain.

“Those who aggressively bet on a cut are rushing to dump their holdings,” says Kong Dong Rak, an analyst with SK Securities in Seoul.

Undeterred by current inflation numbers, Mobius says he is planning to increase investments in the Middle East, North Africa, and Central Asia to about 20 percent from about 2 percent in the next three to five years.