Exchange traded funds tracking one of Asia’s most beleaguered equity markets may be in for a near-term bump after South Korea boosted its 2013 GDP growth outlook to 2.7% from a previous estimate of 2.3%. The country’s finance ministry made the announcement during Thursday’s Asian session and the news sent the Kospi soaring. As of midnight Eastern time the Kospi, South Korea’s benchmark index, was higher by 2.9%.
The news could be beneficial to the iShares MSCI South Korea Capped Index Fund (NYSEArca: EWY). EWY, the largest ETF devoted to Asia’s fourth-largest economy, is down 11.6% in the past month and 21.5% year-to-date, confirming the fact that the ETF is in a bear market. EWY’s year-to-date performance is 500 basis points worse than the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), which had been steadily trimming its exposure to South Korea because index provider FTSE does not classify the country as an emerging market. [Tapering Tumble for South Korea ETF]
South Korea’s improved GDP outlook makes for positive headlines and perhaps a couple of decent days for EWY, but investors cannot overlook the risks facing this economy. The upgrade downplays risks from an expected reversal of US stimulus program, slowing Chinese economy as well as weak external trade conditions due to yen depreciation, according to RTT News.
Don’t just take the media’s words for it. Just last week the Bank of Korea cited the falling yen and the possibility of an early end to QE by the Fed as the biggest risks facing the South Korean economy. “In case the reduction or the end of the U.S. quantitative easing is made visible, negative effects will not be small on international financial markets and emerging market economies as well as our economy,” said BoK. [No Surprises for What Ails South Korea ETF]
Other risks to EWY and the South Korean economy include slumping consumer price inflation and faltering European growth. EWY labors just 2.9% above its 52-week low and the Kospi is on pace for a 9% loss this month, the second-worst among major Asian markets after China, report Emma O’Brien and Adam Haigh for Bloomberg.