(Updates markets)
* Stock futures rebound after North's shelling of South
* Bargain hunters are out after Tuesday's selloff
* Foreigners are net buyers of equities
* Won down vs dollar but 1-month NDFs reflect stronger won
By Jungyoun Park and Yeonhee Kim
SEOUL, Nov 24 (Reuters) - South Korean stock and bond futures rose on Wednesday after North Korea's deadly artillery attack on the South sparked a panicked selloff that longer-term investors viewed as an opportunity to snap up bargains.
The won clawed back some of its early losses and was down around 0.5 percent by afternoon, though major share indexes in both South Korea and Japan were lower, reflecting lingering unease in North Asian markets after the Tuesday attacks, which were the fiercest since the Korean War ended in 1953.
Still, attractive valuations for Korean equities, its highly competitive industries and the country's current account surplus remained draws for foreign and domestic investors, who recalled that past clashes with the North, while less severe, have had only a temporary impact on South Korea's markets.
The diminished threat of capital controls, an unforeseen byproduct of the shelling, was also cited by analysts as a reason to buy back Korean assets.
"If you look back at the last five years when we've had scares, they were all seen as buying opportunities. The rule among hedge funds and long-only funds is that you let the market sell off and watch for your entry point to get involved," Todd Martin, Asia equity strategist with Societe Generale in Hong Kong, said.
Martin said that Korea was his pick for second-best performing market next year in Asia next to Japan.
December KOSPI stock index futures
The main stock index closed 0.2 percent lower but was off early lows, with food-related stocks and shares of companies that make military equipment outperforming.
Turnover in the main KOSPI stock market was 8 trillion won, higher than the daily average turnover last month of 6.5 trillion won.
December 3-year government bond futures climbed 0.27 point
to 112.32
Foreign investors were net buyers of stocks on Seoul's main exchange and Treasury bond futures, indicating a hunger to add risk to portfolios.
"Heightening geopolitical risks are pressuring the share market, but overall, market reaction is fairly calm and we are actually seeing foreign investors and pension funds picking up shares, searching for bargains," said Kwak Joong-bo, a market analyst at Samsung Securities in Seoul.
CHEAP KOREA
Even before the shelling, Korean equity valuations were lower than other Asian markets partly because of the simmering tension between the North, with its nuclear ambitions, and the South.
South Korea is the only market in the MSCI's Asia Pacific ex-Japan index to trade at a single digit multiple based on forecast earnings 12 months forward. The MSCI Korea index was as of Nov. 18 trading at 9.6 times forward earnings, compared with 12.5 times for the regional index, Thomson Reuters I/B/E/S showed.
So, a sudden selloff in the stock market usually turns many fund managers into keen value investors.
Foreign investors have been slowing their buying of Korean stocks considerably throughout this year, shifting allocations to other markets. Foreign inflows to Korea's equity market year to date are up 27 percent from last year, smaller than the growth in inflows to Japan, Indonesia, India and Thailand, TrimTabs Investment Research said in a note.
The won fought back from early losses and was down around 0.4 percent at 1,142.30 per dollar . Dealers said it may have difficulty advancing beyond 1,140 per dollar, the highs of Oct. 20 and Nov. 17 on charts that will act as obstacles.
One-month Korean won non-deliverable forwards opened at 1,170/75 before moving down to around 1,143.35. Trading volume was thin compared to Tuesday, a trader at broker Tullet Prebon said.
NO ARMAGEDDON
Strategists at Nomura in Singapore recommended going short on 3-month dollar/won NDFs, saying the market had sold the won off too quickly on geopolitical risks and that the Bank of Korea has been intervening less persistently, letting the currency strengthen some to fight inflation.
There were no reports of further attacks on Wednesday, and markets in Asia at least appeared to be betting there would not be an escalation in hostilities. Asian stock markets outside of Japan and commodities prices showed signs of steadying.
U.S. President Barack Obama expressed his outrage about the attacks on and near the island of Yeonpyeong, but declined to speculate on U.S. military action.
"We think the provocations by the North are one-offs whose financial market impact will be transitory, not stepping stones to a financial armageddon," Prakash Sakpal, economist with ING in Singapore.
In credit markets, Korean bonds were trading higher, and the 5-year sovereign credit default swaps, basically insurance against default, were at 97/99 basis points compared with Tuesday's widest levels of 107 reached during the New York trading session.
The longest period where North Korea tensions weighed on South Korean markets was after Pyongyang's first nuclear test in 2006. It took five days for the KOSPI to recover its losses, 13 days for the won and 9 days for the 3-year government bond yield, analysts said. (Additional reporting by Choonsik Yoo in SEOUL, Umesh Desai and Saikat Chatterjee in HONG KONG; Writing by Kevin Plumberg; Editing by Kim Coghill)