The MSCI Korea Index has been strong in January 2017
It has been a good January for stocks from South Korea. The MSCI Korea Index has risen 7.7% for the month, leading emerging markets from Asia. It has bettered the performance of both the MSCI Emerging Markets Far East and Asia Indices, which have returned 6.1% and 5.9% respectively.
Though South Korean equities form only one-fifth of the EM Asia Index and 23.3% of the EM Far East Index, it has been instrumental in their returns for January.
The Korean Index’s performance has been middling, though, when it comes to five and ten year periods. It has barely posted growth in the past five years and does not find a spot in the top five emerging markets over a ten-year period.
The iShares MSCI South Korea Capped ETF (EWY) and the AdvisorShares KIM Korea Equity ETF (KOR) invest exclusively in stocks from the country while the iShares Currency Hedged MSCI South Korea ETF (HEWY), the WisdomTree Korea Hedged Equity ETF (DXKW), and the Deutsche X-trackers MSCI South Korea Hedged Equity ETF (DBKO) also hedge currency exposure while investing in South Korean equities.
Reasons for strong performance
If we look at recent developments in South Korea, namely the impeachment of President Park Geun-hye, we would have little reason to believe that Korean equities would be doing well – but they are indeed on the rise. In 2016, we have seen a similar development in Brazil where corruption scandals and the eventual impeachment of President Dilma Rousseff did not deter investors from pouring money into its markets.
For South Korea, things are even better macro economically speaking. Even after reducing economic growth forecasts by incorporating the impact of Donald Trump’s protectionist policies, the government expects South Korea to grow by 2.6% in 2017.
Another factor which is working in favor of the country is cheap valuations and higher expected earnings growth – both quite attractive propositions. Bloomberg described South Korea as Asia’s cheapest market and quoted ABN Amro Private Banking’s chief investment officer Didier Duret as saying that “The corruption probes and all this is an enormous distraction from the fundamentals.”
Meanwhile, the Financial Times reported that according to the Institute of International Finance, about $18 billion was pulled out of eight emerging markets from November 9 until December 16 while “foreign investors have bought a net $1.6 billion worth of South Korean shares in the wake of the US election, lured by low valuations, strong economic fundamentals and expected earnings growth.”
Worries for South Korea include a troublesome neighbor in the form of North Korea and worsening relations with China which saw the latter launching an investigation into the business of Korean company Lotte in China and banning Korea destined charter flights for the month of January.
After analyzing developments in two Asia countries, let’s move on to the next continent: South America.