Compared to scores of other emerging markets ETFs, the 3.5% 2013 gain posted by the iShares MSCI South Korea Capped ETF (NYSEArca: EWY) is downright impressive.
Hampered by the weak yen, a scenario that has not improved, talk of Federal Reserve tapering, a scenario that has been confirmed, EWY struggled through the first half of last year. However, the fund surged almost 24% in the latter half of 2013 as investors shied away from ETFs tracking developing economies with widening account deficits to move into lower beta, account surplus nations. [South Korea ETF Poised for More Upside]
South Korea fit the bill on the account surplus side. Not only that, its stocks were seen as inexpensive. Those traits helped EWY gain 5.1% in the last three months of 2013 compared to a 1.4% gain for the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). EWY could be poised to start 2014 on a strong note as well.
Deron Wagner of Morpheus Trading Group notes EWY has closed above its 50-day moving average in the past two sessions, clearing what he called a “dirty” downtrend line in the process.
“As always, it is important to look for confirmation on multiple time frames when analyzing a potential trade. With EWY, the long-term monthly chart shows that a breakout above the October 2013 high would also coincide with a break of the monthly downtrend line,” said Wagner. “If EWY can clear the $65 level, we could see a rally to the highs of 2008 (around $75).”
EWY is up 3.3% in the past week and added 1.2% on strong volume Tuesday to close at $64.67, less than 1% below its 52-week high.
The bullish technical outlook on EWY is backed by a solid fundamental view on South Korean shares. Strategists view Asia’s fourth-largest economy as one of the best spots in Asia to invest in 2014 because the country is levered to increased U.S. consumption and the recovery Eurozone economy. [How to Bet on Asia in 2014]
The WisdomTree Korea Hedged Equity Fund (NasdaqGS: DXKW) also merits consideration in 2014, particularly if the Bank of Korea decides to challenge its Japanese counterpart and fight slumping yen by moving to depress the won. DXKW debuted in early November and hedges exposure to fluctuations between the value of the U.S. dollar and the Korean won.
iShares MSCI South Korea Capped ETF
Tom Lydon’s clients own shares of EEM.