The emerging markets investment theme has taken a drubbing over the past month or so and the damage has not been limited to just one asset class. Investors’ distaste for developing world economies is not limited to equities, but includes bonds and currencies as well.
That makes picking single-country emerging markets ETFs all the more difficult as few, if any, have been able to escape the carnage. The iShares MSCI South Korea Capped Index Fund (NYSEArca: EWY) is no exception. Emerging markets are witnessing a severe pullback on speculation that the Federal Reserve will taper quantitative easing later this year and perhaps end the program altogether in 2014. Those headlines have been damaging for South Korean stocks and EWY. [Emerging Markets ETFs Pull Back]
It is not just a conjecture that Fed tapering could pressure South Korea’s economy. South Korea’s Finance Minister Minister Hyun Oh-seok said last week said markets there would likely see increased volatility over the debate on the shift in U.S. monetary policy, Reuters reported.
Those comments came just days after the Bank of Korea, the country’s central bank, identified the end of QE and the weak Japanese yen as the primary concerns facing South Korea’s economy, Asia’s fourth-largest.
“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,” the central bank said in a report to policymakers.
Despite South Korea’s reputation as one of the less volatile emerging markets, EWY has not provided investors with any shelter from the emerging markets storm. The yen started materially weakening just over six months ago and EWY has plunged almost 17% in the past six months. In the past month as losses for emerging markets ETFs have accelerated, EWY is down 11.4%, a performance that is worse than that of the more volatile Market Vectors Russia ETF (NYSEArca: RSX).
Last month, the Bank of Korea lowered benchmark rates to 2.25% from 2.5%, its first cut in seven months, citing weaker-than-expected growth in China – South Korea’s largest trading partner – slow growth in Europe and weak inflation. EWY has tumbled nearly 10% since the rate cut was announced. [South Korea ETF Lower After Rate Cut]