South Korea has been entangled by political tensions with North Korea after a military scuffle on the seas. Observers believe that a possible escalation of war between the two countries could prove to be detrimental to South Korea’s economy and constrain related exchange traded fund (ETF).

A few weeks back, a South Korean navy patrol boat was sunk, and it is now believed that the boat was sunk by a torpedo launched by North Korea, writes Don Dion for TheStreet. The South Korean President Lee Myung-bak has vowed retaliatory action. [What a Stronger Yuan May Mean.]

The South Korea ETF iShares MSCI South Korea Index (NYSEArca: EWY) has been trading sideways ever since the incident, despite optimistic reports about the current state of the country’s economy.


For example, Korean automakers Hyundai Motors and Kia Motors have both reported strong sales numbers due to increased sales abroad, and domestic sales are also improving. Samsung also announced robust first-quarter earnings that beat estimates, and the company is expanding production, betting on higher future demand. [Opportunity Knocking in South Korea?]

Dion believes that EWY will remain relatively flat until a political decision is made in the government’s response for this situation. If South Korea pursues sanctions against North Korea and not military action, EWY could move upward as business returns to normal, adds Dion.

For more information on South Korea, visit our South Korea category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.