Time to Consider Korea Hedged Equities

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Money has flowed into Japan on expectations that the Bank of Japan (BOJ) and government are taking coordinated actions to end deflation and reinvigorate Japan’s economy. The weakening of the yen has been one factor supporting its markets.

Korea’s patience for won appreciation and pressure on its major exporters, especially in products that compete with comparable Japanese products, is facing a critical stress test. The joint statement by Korea’s Ministry of Finance and the Bank of Korea shows that the run of appreciation for the won may be coming to an end.

To that point, on July 15, there was a move in the won that many traders attributed to intervention from the central bank.8

I believe that the underperformance of Korean equities in recent years is creating a relatively attractive entry point, especially if the government and central bank were to take more aggressive action to weaken the won.

This could be the time to start looking more seriously at Korean currency-hedged equities.

1Performance measured against the U.S. dollar from 12/31/13 to 6/30/14. South Korean won trailed only the Brazilian real among currencies represented in the MSCI Emerging Markets Index universe over this period.
2Source: Bloomberg, as of 6/30/14.
3Jiyeun Lee and Eunkyung Seo, “Korea Rate Bets Undone as Choi Nomination Flags Growth Push,” Bloomberg News, 6/18/14.
4Kwanwoo Jun, “South Korea Issues Rare Warning on Currency Surge,” Wall Street Journal, 7/2/14.
5Source: Bloomberg, with the 6.6 value as of 6/1/12 and the value greater than 10.1 as of 7/3/14. Period chosen to encompass an environment that reflected the picture before Prime Minister Abe began to gain significant influence.
6Refers to the TOPIX as a measure of Japanese equity market performance.
7Refers to the MSCI Korea Index and the KOSPI, both measures of the performance of Korean equities. These are widely followed benchmarks of Korean equity performance.
8Neil Dennis, “Korean Won Falls on Suspected Intervention,” Financial Times, 7/15/14.

Important Risks Related to this Article

Investments focused in Korea are increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.