Although most Asian bourses such as the Shanghai Composite and South Korea’s Kospi have lagged U.S. stocks this year, Goldman Sachs sees some opportunity in the North Asian region, but investors opting to follow the bank’s advice should be selective when it comes to selecting ETFs.
Goldman “estimates only one percent returns at the regional level amid macro-economic challenges, pedestrian earnings, middling valuations and poor risk-adjusted performances so far this year,” reports Leslie Shaffer for CNBC.
The bank also noted that tapering of quantitative easing by the Federal Reserve and slowing Chinese economic growth will have varying impacts on North and South Asian equity markets. “North Asian economies have greater sensitivity to U.S. growth, are less vulnerable to (quantitative easing) exit concerns, have better fiscal and domestic credit conditions, and are seeing foreign inflows as investors reduce underweight positions,” CNBC reported, citing a Goldman report.
The iShares MSCI South Korea Capped ETF (NYSEArca: EWY) qualifies as a North Asia play. Although central bankers and policymakers in South Korea, Asia’s fourth-largest economy, have previously acknowledged tapering is one of the two biggest risks (the other being the weak yen) facing their economy, Goldman is Overweight South Korea, citing the familiar theme of discounted valuations. [Tapering Tumble for South Korea ETF]
The bank also implied foreign investors are under-allocated to South Korea, CNBC reported. The bank added that AAA-rated Singapore is one of the safer avenues in South Asia. In the past three months, EWY has jumped nearly 17% while the iShares MSCI Singapore ETF (NYSEArca: EWS) is up 5.5%. [Sunny Days for EM ETFs if Fed Resists Tapering]
Since the start of September, EWY, along with the equivalent Brazil and China ETFs, has seen inflows as investors began embracing emerging markets ETFs after the Fed opted not to taper its bond-buying program. [Cash Flows Back to Emerging Markets ETFs]
South Korea is perceived as being one of the lower beta, least volatile emerging markets and that trait could explain why investors are embracing EWY. While South Korea’s reputation as a more advanced, less volatile emerging market could serve as a positive underpinning for EWY, Goldman is not as enthusiastic about some other Asian markets.
The bank is “market weight” on China, Philippines, Taiwan and Thailand and “underweight” on Australia, Hong Kong, Indonesia, India and Malaysia, according to CNBC.
Goldman recommended a long/short trade in the report, advising long positions in EWY and the iShares MSCI Taiwan ETF (NYSEArca: EWT) and short positions in the WisdomTree India Earnings ETF (NYSEArca: EPI) and the iShares MSCI Indonesia ETF (NYSEArca: EIDO). Like South Korea, Taiwan is viewed as a low-beta, highly advanced emerging market. EWT has a beta of just 0.47 against the S&P 500, according to iShares data.
Due to plunging currencies and widening account deficits, EPI and EIDO are down 20.1% and 18.4%, respectively, year-to-date.
iShares MSCI South Korea Capped ETF
ETF Trends editorial team contributed to this post.