The Korean market and economy are highly correlated with global growth. Deterioration in the global growth outlook has recently led to a severe market correction. The MSCI Korea dropped 15% year-to-date (as at 29 August), underperforming the MSCI Asia ex. Japan by 2.7%, with equities declining markedly in August. In terms of sectors, consumer staples and utilities were the best-performing sector in August, while energy, materials and industrials were the worst performers.
Notwithstanding that Q2 earnings results mostly exceeded consensus, the market is more concerned about the outlook for the second half of this year. Exports could fall, but the country remains competitive on pricing; exports are more skewed (for about 60%) towards the relatively resilient emerging markets than to the sluggish developed markets. Corporate investment has been disciplined and thus the chance of serious overcapacity remains low. Government finances are healthy and there is room for stimulus measures when needed. Going forward, global macro risks are likely to dominate the equity market momentum for a while. Given that Korea is an export-oriented, manufacturing intensive cyclical economy, recession calls are disproportionately important to the market’s earnings outlook. However, if global risks stabilize without causing a serious shock to the global economy, the Korean market is expected to resume its momentum again.
The MSCI Korea is trading at a P/E of 7.3x 2012e with EPS growth of 17.7%, which is undemanding, and at a modest forward discount to regional peers. The market looks poised for regaining earnings momentum on the strength of its leading exporters, with global competitiveness when global macro uncertainties subside.
Investors could allocate a certain percentage (5%) to Korea. Buying ETFs is a great way to profit from the current turmoil in the financial markets. The iShares MSCI South Korea Index ETF EWY offers you the choice to profit into the future.
|Profile as of 9/21/2011|
|Total Net Assets||$3.729.819.186|
Total Holdingsas of 8/31/2011
iShares MSCI South Korea Index ETF
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.