Moon Jae-in, South Korea’s new president-elect, may prove to be the right tonic for investors who have been alarmed by regional tensions on the Korean Peninsula. Mr. Moon has promised to bring a softer touch to the current challenges with North Korea.
And he inherits a dynamic economy that is “very well levered to rising global trade,” says Tushar Yadava, investment strategist at iShares. South Korea is now the world’s fifth-largest exporter thanks to free trade agreements with nations representing 75 percent of the global economy. Each year, South Korea sends more than $500 billion in goods abroad led by electronic goods, auto vehicles and ships.
South Korea’s strong export focus has been a mixed blessing, though. Global trade volumes have slumped since the 2008 recession, leading the iShares MSCI South Korea Capped ETF (EWY) to fall in value in 2011, 2014 and 2015 while delivering a tepid 2.73 percent average annual return over the past decade.
But the nation’s export focus has taken on a fresh sheen in 2017. The value of South Korea’s exported goods surged 24.2 percent in April compared to a year earlier, a rate which has increased for each of the past six months.
Moreover, earnings reports from major South Korean firms such as Samsung Electronics and Hyundai have been strong thus far in 2017, notes Yadava. Those factors help explain the 16.7 percent gain this year for the iShares fund. And IMF predictions of growing global growth in 2017 and 2018 should keep that export tailwind in place in the near-term.
Yet the China conundrum could be challenging. China, which consumes roughly $130 billion in Korean goods each year and is the nation’s largest trading partner, is placing a growing emphasis on its own consumer production. Samsung, for example, controlled 20 percent of the Chinese cellphone market in 2012, though that figure has recently shrunk to six percent. And Chinese auto makers aim to build a global sales presence, which potentially could cut into South Korea’s strong market position.
Also, disputes with China over a U.S.-supplied anti-missile shield known as THAAD (Terminal High-Altitude Area Defense system) have led to recent sporadic Chinese boycotts of Korean-made goods.
Such concerns may be impacting investor sentiment. The shifting winds with China, the heated rhetoric with North Korea, and a government corruption scandal have led to outflows of $158 million from the iShares MSCI South Korea Capped ETF in 2017. That’s in contrast to an otherwise strong backdrop for other emerging market funds. (FTSE considers the nation to be a developed market, but others, such as MSCI, still consider South Korea to be an EM).
The iShares MSCI Emerging Markets ETF (EEM), for example, has seen inflows of $780 million thus far in 2017, while the iShares Core MSCI Emerging Markets ETF (IEMG) has attracted $8 billion, according to Yadava.
This week’s presidential election might calm the waters with North Korea and could help reverse those outflows, says Yadava. “A move towards stability would be greeted well by investors.”