Value Investing in South Korea February 6, 2017

South Korea ETFs invest in stocks of South Korean companies in major sectors. Although South Korea have been in the forefront of technology advancement (with its local conglomerates Samsung and Hyundai being frequently compared to big names such as Apple and Toyota), this has not stopped it from being classified as an Emerging market. With expectations of South Korea posting a modest 3 percent growth on GDP for the full year of 2016, an impeachment vote to remove President Park from office, along with the arrest of Samsung’s Vice Chairman Mr Jay Y. Lee, the markets will be roiled with uncertainty.


Background of Scandal

According to BBC.com, President Park is involved in a scandal due to her relationship with Ms Choi Soon Sil, who is currently being accused of using her presidential connections to coerce companies to make millions of dollars in donations to two not-for-profit foundations that she control. This has also implicated several major companies, with Samsung being one of them. Prosecutors claimed that Mr Jay Y. Lee approved 43 billion won worth of bribes to President Park and Ms Choi through donations made to Ms Choi’s not-for-profit foundations, in order to gain favours and concessions from the Government. As a result, new elections will be held within 60 days if the courts rule against President Park.

The two larger ETFs that track the South Korea index are the iShares MSCI South Korea Capped ETF (EWY) and Direxion Daily South Korea Bull 3X ETF (KORU). We will be using these ETFs for illustration purposes in this article. Index tracking South Korea ETFs such as EWY and KORU are managed by well- known service providers such as iShares and Direxion. Most ETFs that track the broad market South Korea Index pay dividends, and have expense ratios ranging from 0.6 to 1 percent.

Factsheets

Source: Factsheets


The percentage composition for sectors are similar amongst these South Korea ETFs, with minor variations, depending on the aggressiveness of the fund manager. The heaviest weighting for South Korea ETFs will in most cases be focused on the biggest conglomerates in South Korea, such as Samsung, SK Hynix and Hyundai. Electronics and manufacturing sectors dominate the South Korean market which is fundamentally different from other markets, as Country ETFs would usually have financials forming the biggest component.

Factsheets

Source: Factsheets


The generic characteristics of country ETFs are usually similar as they take on a single country view, have close to a hundred percent composition in stocks, and do not perfectly track the underlying index, due to varying degrees of tracking error.

Factsheets

Source: POEMS 2.0 Chart-Live


Investors who wish to invest in such ETFs will have to take note of the foreign currency risks involved. This is because many of such ETFs are traded in USD. Therefore investors will be affected in the event that there are currency fluctuations.

Some investors might also be worried about buying into South Korea ETFs as these expose them to certain degrees of political risks from the ongoing Presidential scandal. Apart from this, there is also North Korea’s constant rhetoric that might jeopardize the economic stability of South Korea. Investors need to understand that in recent years, it is becoming increasingly obvious that the South Korean market has already priced – in the occasional threats made by the North.

Investors will also need to consider the rapid globalisation of these South Korean conglomerates that the ETFs are exposed to. Companies such as Samsung, Hyundai and LG Chem have a significant portion of their earnings derived from across the globe. Therefore, investors who invest in such ETFs will not only see themselves being moderately exposed to South Korea’s economy, but also experience additional exposure to foreign market activities.

If you wish to know more information about South Korea ETFs, you can talk to a Dealer at a Phillip Investor Centre near you.

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About the author

Kervin Ong Zhi Yong
POEMS Dealer
Jurong West Dealing Team

Kervin Ong currently provides dealing services to a portfolio of trading accounts and is part of the POEMS Dealing Team. Apart from his Dealing role, he also gives training seminars to further enrich his clients’ financial knowledge under his care.

An external auditor by profession before joining Phillip Securities, his background in due diligence and statutory audits for listed companies equips him with in-depth analytical skills; a skill hugely advantageous for value investors who seek to invest in companies with favorable valuations or shrewd management.

Kervin holds a Bachelor of Science in Applied Accounting (Hons) from the Oxford Brookes University, along with memberships under the Association of Chartered Certified Accountants (ACCA) and Institute of Singapore Chartered Accountants (ISCA).

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