The South Korean market and country-specific exchange traded funds have been on fire in April, strengthening on the earnings growth, prospect of rising dividends and cheap valuations.
Over the past month, the iShares MSCI South Korea Capped ETF (NYSEArca: EWY) rose 9.6%, Horizons Korea KOSPI 200 ETF (NYSEArca: HKOR) gained 9.3%, First Trust South Korea AlphaDEX Fund (NYSEArca: FKO) increased 13.0% and SPDR MSCI South Korea Quality Mix ETF (NYSEArca: QKOR) returned 7.2%.
The benchmark Kospi Index advanced 12% so far this year, broke through the 2,100 and touched its highest level in four years last week as foreign investors piled into the market, reports Song Jung-a for Financial Times.
Investors have also been riding the rally with South Korea ETFs. For instance, EWY has attracted $142.3 million in net inflows in April, according to ETF.com.
“Foreign investors finally began catch-up buying this year after being significantly underweight Korea for the past several years,” Bryan Song, head of research at Bank of America Merrill Lynch, said in the FT article.
Fueling the increased interest in South Korean equities, the Bank of Korea cut its interest rate to a record low of 1.75% back in March to stimulate the economy. Observers anticipate further monetary easing and fiscal stimulus ahead. [Muted Reaction to Rate Cut for South Korea Hedged ETFs]
Analysts also believe Korea’s relatively cheap valuations are attracting investors as well, reports Chao Deng for the Wall Street Journal.
Specifically, the Kospi is trading at a 11.1 times projected earnings for the next 12-months, whereas the MSCI Global Index shows a 16.4 P/E and the S&P 500 Index has a 18.4 P/E. Looking at the ETF options, EWY has a 10.3 P/E, HKOR has a 10.7 P/E, FKO has a 10.5 P/E and QKOR has a 10.3 P/E.
The low energy prices and cheap financing have also supported investor sentiment and positive outlook for earnings growth ahead. Tech companies, such as Samsung Electronics, are leading hopes of a turnaround in earnings. Samsung is also regaining its title as the world’s premier smartphone vendor, overtaking U.S. rival Apple (NasdaqGS: AAPL) last year, CNBC reports. Samsung is a major component in South Korea ETFs, including a 20.0% position in EWY.
Moreover, higher dividend payouts and stock split are encouraging some investors. Korean companies are facing increased pressure from the government to raise dividends, which are among the lowest of any large economy in Asia.
The South Korean won currency has also been strengthening and was hovering near a six-month high against the dollar in response to a more dovish outlook on the Federal Reserve’s interest rate stance, Economic Times reports. With the won currency strengthening, currency-hedged ETFs, such as the Deutsche X-trackers MSCI South Korea Hedged Equity ETF (NYSEArca: DBKO) and the WisdomTree Korea Hedged Equity Fund (NasdaqGM: DXKW), have underperformed non-hedge South Korea ETFs. Over the past month, DBKO was 5.5% higher and DXKW was up 6.5%.
iShares MSCI South Korea Capped ETF
For more information on South Korea, visit our South Korea category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.