South Korea, the motherland of powerful companies such as Samsung, LG, and Hyundai, looks primed for economic growth in the coming months. If that is true, investors can look to exchange traded funds (ETFs) to benefit from the upswing.
Two main developments give cause for bullish sentiment on the South Korean economy in the coming months. The first has to do with the revaluation of the yuan, and the second has to do with recent economic forecasts released by Korea’s central bank.
Under increasing pressure from world governments, China finally seems to be hinting at allowing its currency to appreciate, reports Lee Hyo-sik of The Korea Times. In the short run, an appreciation of the yuan relative to the dollar should help Korean exports be more price-competitive in the global market. But in the long run, a revaluation will also raise consumer prices and put upward pressure on the South Korean won, reversing the positive effects of a stronger yuan in the short run. [ETFs to Watch as Chinese Yuan Battle Heats Up.]
Although some U.S. lawmakers have demanded a revaluation by as much as 40%, analysts predict a 3%-5% appreciation in the value of the yuan.
On Monday, South Korea’s central bank raised its 2010 growth forecast to 5.2%, up from 4.6% last December. This is in line with “brisk exports and improving domestic demand,” said Lee Sang-Woo, director-general of the central bank’s research department. The forecast is even more bullish than that released by the finance ministry and would be the fastest growth in Korea since 2006, when it grew 5.2%.
Broken down, the bank forecasts:
- 11.9% growth in exports, up from a previous forecast of 9.3%
- 4% growth in private spending, up from a previous forecast of 3.6%
- 13.4% growth in capital investment, up from a previous forecast of 11.4%
- 2.6% inflation, down from a previous forecast of 2.8%
Although South Korea is on a strong economic recovery track, the tenacity of the recovery will be tested as the government’s financial spending wanes. It will be key to see whether the private sector can bear the burden of growth in the coming months. Investors should also keep an eye on the yuan situation and how it affects South Korea’s trade.
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- iShares MSCI South Korea Index (NYSEArca: EWY)
Sumin Kim contributed to this article.