The bad news, part of the bad news anyway, is that the iShares
MSCI South Korea Capped Index Fund (NYSE:
) is down 12.5 percent year-to-date. That makes EWY, one of the
largest country-specific emerging markets
by assets with over $3.26 billion, a laggard among funds tracking
emerging Asian economies.
The good news, in the eyes of some investors, is that South
Korean equities are now viewed as inexpensive. Famed emerging
markets investor Mark Mobius of Franklin Templeton
has said as much
and he is correct.
EWY has a P/E ratio of 14.68 and a price-to-book ratio of
according to iShares data
. Based on those numbers, EWY's valuation is less expensive than
what is found on the iShares MSCI Emerging Markets Index Fund
) or the comparable Thailand and Philippines ETFs, just to name a
Unfortunately for South Korea bulls, stocks there can easily
get cheaper. Of the more frequently cited risks to EWY and South
Korean stocks there is the obvious, that being the looming
specter of an attack from volatile North Korea. Then there is the
notion that selling of South Korean stocks by Vanguard is an
Vanguard, the third-largest U.S. ETF issuer, is transitioning
the Vanguard FTSE Emerging Markets ETF (NYSE:
) to the FTSE Emerging Markets Index. The FTSE Group does not
classify South Korea as an emerging market, which means Vanguard
has been selling South Korean stocks. However, the market has
known for more than six months Vanguard would be doing so and, to
Vanguard's credit, the firm's sale of South Korean shares has
orderly and gradual
In other words, the biggest risk to EWY and South Korean
stocks is the plunging Japanese yen. South Korea has been among
the most vocal critics of Japan's weak yen policy and it is easy
to understand why.
Should South Korea's won gain 10 percent against the yen, the
result could be a 1.9 percent year-over-year reduction in South
Korean exports in the current quarter,
according to Yonhap News Agency
"As the U.S. dollar-yen exchange rate is nearing the ratio of
(one dollar) to 100 yen, we are facing increasing threats the
depreciating yen may bring to South Korea's exports," Yonhap
reported, citing South Korea's Ministry of Strategy and
On January 1, JPY/KRW traded around 12.185. Today, the yen
trades at 11.2825
against the won
. At the start of this month, JPY/KRW was trading above 12.
That comes after the won gained 4.7 percent against the
Japanese currency in the first quarter. Mobius also acknowledged
the risks the falling yen poses to South Korea.
"South Korea's market also bears some risk from further
weakness in the Japanese yen. Yen fluctuations can impact South
Korea more than some other economies in the region because South
Korea competes directly with Japan in the manufacture and export
of value-added, high-technology products and machinery," he noted
in a recent blog post.
Regarding EWY, South Korea expects the weaker yen will be more
damaging to small and medium-sized firms, implying large
conglomerates such as Samsung may prove somewhat sturdy. Samsung
is EWY's largest holding at 23.1 percent of the ETF's weight.
That does not mean EWY will be completely insulated from the
falling yen, but it could mean there is a fair chance EWY does
end up with valuations that are even more attractive than what
the ETF currently sports.
For more on ETFs, click
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