South Korean stocks managed to race higher in the latter half of 2013 as global investors favored lower beta emerging markets that were home to strong currencies and current account surpluses.
The fervor over emerging economies with account surpluses, in the case of South Korea, meant investors overlooked a previous warning from South Korean central bankers and policymakers: The weak yen is real threat to Asia’s fourth-largest economy. [Investors Rush Into South Korea ETFs]
An appreciating won is contributing to tighter monetary conditions that could hurt a recovery in South Korea, possibly prompting the Bank of Korea to cut its policy rate at a meeting this week, Bloomberg reported, citing a Goldman Sachs note.
Downward pressure on the won, assuming that scenario materializes, could benefit the newly minted WisdomTree Korea Hedged Equity Fund (NasdaqGS: DXKW). Put simply, DXKW is the South Korea equivalent of the wildly popular WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ).
DXKW, which debuted in early November, holds some of the more familiar names in South Korean business, including Samsung, Hyundai and Kia, but the ETF also features a hedged won component comparable to DXJ’s hedged yen advantage.
Although South Korea has room to lower interest rates, questions linger about the Bank of Korea’s willingness to engage in an all-out currency war with its Japanese counterpart. BOK lowered rates to 2.25% from 2.5% last May, the central bank’s first rate cut in seven months. South Korean stocks traded lower immediately following that news, but would eventually end 2013 looking better than most developing markets. [South Korea ETFs Lower After Rate Cut]
For its part, DXKW has shown that if the won does weaken in earnest, the ETF is poised to benefit. The ETF confirms as much because in its short lifespan, the won has strengthened and the fund is down 7.7%.
South Korea is home to the world’s 15th-largest economy, third-largest equity market in the Pacific Rim and is is the 7th-largest exporter and the 10th-largest importer in the world, according WisdomTree Research Director Jeremy Schwartz, prompting some debate as to whether the country is emerging or developed. [WisdomTree: Is South Korea Developed or Emerging?]
WisdomTree Korea Hedged Equity Fund
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ.