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South Korean Stocks: Vulnerable To Escalating COVID-19 Outbreak And Macro Risks

Mar. 02, 2020 1:34 AM ETiShares MSCI South Korea ETF (EWY)2 Comments


  • South Korea is currently witnessing a spreading outbreak of the COVID-19 virus with the greatest number of infections outside of China.
  • The country's Central Bank is warning that a prolonged outbreak represents downside risks for economic growth and likely requires revisions lower to current forecasts.
  • The EWY ETF is exposed to weaker macro trends as a key risk and could also be pressured by a depreciating Korean won.

The iShares MSCI South Korea Capped ETF (NYSE:NYSEARCA:EWY) is the largest country-specific exchange-traded fund to track a basket of the most important Korean companies. Korea is long recognized as a high-tech manufacturing hub and innovator in various industries, including semiconductors. The economy has been pressured in recent years based on weaker cyclical trends and more volatile trade conditions in the Asia-Pacific region. While expectations into 2020 were for a rebound in growth, the emergence of the COVID-19 outbreak in Korea with the highest number of cases outside of China represents a new layer of uncertainty for the country's macro outlook. We see the risk for a deeper economic slowdown with implications for the EWY ETF that may also be pressured by a depreciating Korean won.

(Source: finviz.com)

COVID-19 Outbreak in South Korea

The coronavirus "COVID-19" outbreak that began in China has now spread to other parts of the world. South Korea with 1,766 confirmed cases as of February 27th is the current global hotspot with the most new number of new cases. Data shows that 43% of all cases outside of China have occurred in South Korea with the government taking emergency response measures, including school closures, while other countries have enacted travel restrictions. The situation poses a major disruption to the economy as its major cities and manufacturing centers are vital for economic activity.

(Source: Worldometers.info)

There is still significant uncertainty as to the extent of the outbreak and when conditions can normalize. Beyond the public health crisis, a general fear among the population is likely to limit consumer activities and retail spending with people potentially avoiding public settings. We expect the impact to be widespread across confidence indicators, business sentiment, labor market dynamics, and the investing environment which in our opinion is bearish for Korean stocks and the EWY ETF.

This article was written by

Dan Victor, CFA profile picture

Dan Victor, CFA is a market professional with more than 15 years of investment management experience across major financial institutions in research, strategy, and trading roles.

Dan leads the investing group Conviction Dossier, where his focus is on helping investors stay ahead of market trends and inflection points. Dan’s investing vehicles of choice are growth stocks, tactical exchange-traded funds, and option spreads. He shares model portfolios and research to help investors make better decisions, via his Investing Group’s active chat room.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)

Ron Burgundy’s Hair profile picture
At least South Korea isn’t as vulnerable to NoKo nuclear ballistic missiles as was happening during failurefortyfour’s time
g23riel profile picture
What happens with EWY is probably very telling of what will happen with Asian markets.
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