South Korea, Hong Kong, Taiwan and Singapore are not your typical emerging markets. In fact, they are fairly mature countries in a political, economic and demographic sense. Some are no longer classified as "emerging," yet they sit at the crossroads of Asia's economic evolution and are worthy of a close look.
Asia ETFs - Mature Emerging Markets
Some unique and positive features
Generally speaking these four countries share some positive characteristics. First they are all relatively large and liquid equity markets. Second, they have relative political and economic stability. Corporate governance standards are above average for most emerging markets and managements have a concept of shareholder return. Currencies are stable and legal systems attract all forms of capital.
A look at the portfolios of the respective country ETFs shows companies that are still cyclically driven with significant exposure to the emerging world.
IT's all cyclical
Korea and Taiwan depend heavily on exports of IT related electronics (Taiwan especially) which is driven by global demand. This is not unlike other emerging markets that depend on global demand for commodity exports, only Korea and Taiwan are not stuck in a "stone age" like some other emerging markets.
iShares MSCI South Korea Capped (NYSEARCA:EWY) is the only US-listed ETF offering Korean equities exposure. EWY has high IT sector exposure to go with large holdings in the automotive sector, heavy industry, financials and materials. The country boasts a well-educated and organized populace that has in many ways mimicked Japan's success. Many Korean companies have become household names at the expense of Japanese industry which has suffered from structural Japanese Yen strength. Times may be changing. The recent reversal of this mega-trend - the won has appreciated by around 20% since last summer - is a key risk to many industries in Korea.
EWY follows the MSCI capped index, which is a new MSCI index designed to limit any single issuer to a 25% weight in the fund and limit the sum of all issuers representing more than 5% of the fund to not exceed 50% of the fund's total assets. This is to protect the fund from being too concentrated in a few holdings. Samsung represents 22% of the fund but South Korea is a relatively deep equity market and the fund is not at risk of becoming "top-heavy" with over 100 holdings.
iShares MSCI Taiwan (NYSEARCA:EWT) is the most heavily IT oriented market in the world thanks to its major semiconductor businesses. Taiwan Semiconductor alone represents 21% of its portfolio and the IT sector represents over 54% of Taiwan's investable market according to MSCI. Other large sectors include financials and materials. Taiwan is a relatively deep equity market with over 100 holdings in the fund.
Taiwan equities depend heavily on global semiconductor demand and general demand for goods and services coming from China. Progress on closer trade ties between China and Taiwan could be a driver for the market.
Bases for regional exposure
Many Hong Kong and Singapore-based companies have regional exposure spread throughout parts of Asia. Their economies are trade driven and correlated to global cyclicality. Both countries benefit from relatively sophisticated legal and financial market standards and have established pension funds with active engagement in equity markets. They are not dissimilar to many developed markets yet they are on the doorstep to many attractive developing markets.
Interestingly, both countries face a microcosm of China's challenges regarding its own overheating property market, and have recently introduced measures to cool the market.
iShares MSCI Hong Kong (NYSEARCA:EWH) consists of stocks traded on the Stock Exchange of Hong Kong. The portfolio is mostly oriented toward companies or conglomerates involved in financial services, property and development, and international trade. AIA Group represents 14% of the portfolio and is a leading pan-Asian life insurer for example. EWH also has meaningful utility sector exposure and exposure to some large entertainment and gaming companies. The future of Hong Kong equities will depend on greater Chinese/global growth and maintenance of its relatively sophisticated micro political economy. EWH has 42 holdings.
iShares MSCI Singapore (NYSEARCA:EWS) consists of stocks traded on the Singapore stock exchange. The market has large exposure to financials (49%), industrials and telecom companies. The fund's largest holding, Singapore Telecom, has regional interests in Australia, Indonesia and India among other places; and is expanding into new media. Many companies in the fund are also exposed to real estate and development. Singapore companies are active throughout the ASEAN region, and the city-state is attractive as a political and economic safe-haven. The market also offers an attractive dividend yield (4%). EWS is the smallest fund of the group with 32 holdings.
Liquidity is good
All the funds in the group are highly liquid led by EWY which trades over $130m/day. EWH trades near $100m/day, EWT around $80m/day and EWS trades almost $20m/day.
EWH and EWS have returned the most
Relative to the benchmark iShares MSCI Emerging Markets (NYSEARCA:EEM), all the funds have outperformed except Taiwan which is highly correlated to EEM. Hong Kong and Singapore have been solid performers along with Korea.
Where do we go from here?
It's hard to see any catalyst causing Taiwan to decouple from the broader global cyclical trends besides warming relations with the mainland. Korea has performed well yet potential clouds are forming on the currency front. Hong Kong and Singapore offer certain attractive features. These include currency and political stability, reasonable dividends, corporate governance, and exposure to Asia's economic growth. For investors looking for a foothold in east Asia; EWH and EWS offer some solid alternatives.