South Korea: A Bright Spot in Emerging Markets

emerging-markets
gannatti
Head of Research, Europe
03/28/2016

Emerging market equities have had a rough few years. While it isn’t difficult to intellectualize that trends are cyclical and that emerging market equities have great potential over the longer term, marrying that with the idea of current action has not been simple. However, opportunities exist, if you know where to look. And where are we looking? South Korea. Consider this:
• South Korea is a major exporter. Compared to performance we’ve seen from exporters in Japan and Europe in the recent past,1 we see similar potential in South Korea. • The South Korean won is relatively inexpensive to hedge—meaning that short-term interest rates tend to be lower than those in more commodity-focused emerging market countries such as Brazil. • It is widely known that South Korean companies and Japanese companies are close competitors. Since November 30, 2012, two weeks prior to the election of Japanese prime minister Shinzo Abe, the South Korean won has appreciated approximately 24% versus the Japanese yen. From December 31, 2015, to March 16, 2016, the South Korean won depreciated 8% against the Japanese yen.2 Could this be a catalyst for the equities in this market to regain some of their global competitiveness?
  To Hedge or Not to Hedge While we see opportunity in South Korea, it’s important to note that the key drivers of performance were the equity returns alone. Layering on currency risk (inherent to all unhedged international investing) dragged down the total performance. The chart below makes this point.   South Korea’s Equity Market vs. MSCI Emerging Markets vs. the Currency South-Korea-Performance For definitions of indexes in the chart, visit our glossary. What Is Working in South Korea? Materials: Over the period from December 31, 2015, through March 16, 2016, the Materials sector within the WisdomTree Korea Hedged Equity Index delivered a 7.22% return. LG Chemical Limited (8.1% weight) was the only firm with a weight above 2.5% that had a negative return over the period, indicating a relatively broad-based positive performance for the sector. Lotte Chemical Corp. (2.7% weight) and POSCO (4.3% weight) were both up over 20% for the period. This ties into the broader theme of a rebound within the Energy and Materials sectors within emerging markets that we’ve been seeing of late. Depreciation of the Won: To gain inclusion in the WisdomTree Korea Hedged Equity Index, every constituent must generate less than 80% of its revenues from South Korea, and every constituent must be profitable.3 Whether one measures the value of the won versus the yen (down 8.0% year-to-date) or against the U.S. dollar (down 1.7% year-to-date), we can see a clear trend of depreciation. All other things being equal, this has the potential to increase the competitiveness of South Korean companies.       Learn more about WisdomTree’s approach in South Korea. 1Exporters within Japan and Europe refer to the WisdomTree Japan Hedged Equity Index & WisdomTree Europe Hedged Equity Index universes. Source: Bloomberg. 2Source: Bloomberg. 3Bloomberg, with period studied from 12/31/15 to 3/16/16.

Important Risks Related to this Article

Investments focused in South Korea increase the impact of events and developments associated with the region, which can adversely affect performance.

About the Contributor
gannatti
Head of Research, Europe

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he will be based out of WisdomTree’s London office and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.