Smart investors are always keeping their eyes toward other
frontiers, turning over stones to find value where others may
least expect it.
For many, that means unearthing lesser-known opportunities
outside of the developed world and looking to the emerging
markets of Europe, Africa, Latin America and Asia.
a fan of international investing
, I've spent considerable time digging through BRICs (Brazil,
Russia, India and China), MINTs (Mexico, Indonesia, Nigeria and
Turkey) and everything in between. Through all of that research,
I discovered one country that not only lacks the coverage it
deserves... but presents a potentially lucrative opportunity.
For years, South Korea has been caught in the shadow of some
of its more recognized neighbors like China, Indonesia and
Vietnam. And there's a good explanation: the country's high
degree of economic advancement may have tipped the scales and
pushed it out of emerging market territory and into the company
of more developed nations.
What makes South Korea an attractive investment in my
• Impressive economic advancement - The small country is the
seventh-largest exporter in the world and the fourth-largest
economy in Asia.
• High concentration of global tech leaders - Household names
like LG, Samsung, Kia and Hyundai call South Korea home.
• A business-minded government - President Park Geun-Hye outlined
a three-year economic innovation program that intends to make
Korea more competitive with neighboring Japan, China and
While we could argue the merits of each Korean company
individually, my recommendation is to find a diversified,
country-specific ETF when looking to invest in a market like
iShares MSCI South Korea Capped Index Fund (NYSEArca:
is a clear winner.
The ETF's holdings are a venerable who's who of well-known
South Korean global conglomerates. With $4.7 billion in net
assets, EWY is the largest and most liquid Korean index fund.
See below for a breakdown of the fund's top ten holdings and
their percentage weights:
Analysts believe that Korean cash-rich companies, like the
ones above, will begin to pay larger dividends in the coming
months. This expectation helped prop up EWY by nearly 4% in the
past month alone. The index is now reaching pre-recession levels,
but it remains undervalued compared to the major indexes of more
developed markets like the United States.
A recent interest rate cut by the Bank of Korea, the country's
central bank, also helped bolster growth for the fund. The August
14 cut was the first in over a year and is intended to foster
consumer confidence and ignite the local property market.
Current trading ranges of EWY support a higher share price and
outside investors are beginning to take note.
Capital flows into the ETF increased by almost $112 million
during the first two full weeks of August. To lend some
perspective, inflows for the
iShares MSCI Japan ETF (NYSEArca: EWJ)
lost $48.8 million in the same time period. The undervalued
argument continues when comparing valuations to competitors like
Taiwan, India, Malaysia and the Philippines. Korea is still
trading at a surprising discount.
Big funds and institutional investors are on board with the
South Korean ETF as well. According to EWY's most recent 13F SEC
filings, BlackRock, Inc., an investment management firm, owns
approximately $117 million of the fund. Bank of America bests
that number with an investment of nearly $200 million. Goldman
Sachs, Morgan Stanley and Wells Fargo round out the list of
Recent ratings from sell-side firms validate my confidence.
S&P Capital IQ views the ETF as "overweight," or a strong
buy. Standpoint Research mirrors that positive sentiment and set
a price target of $78. The fund currently trades at around
Risks to consider:
South Korea's strong export economy, while one of the
country's greatest strengths, opens the possibility for cracks
in its armor. It is well-documented that Korea has a very low
birth rate, meaning that dependence on external growth through
exports is a real concern. Currency risk also needs to be
heeded, as EWJ does not hedge foreign exchange moves between
the won and USD.
Action to take -->
Adventurous investors looking to park cash in a lesser known Asia
play should strongly consider South Korea. Tech dominance,
impressive consumer recognition, low volatility and a discounted
valuation present the case for an attractive long-term hold.
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