Amid global growth concerns sparked by unceasing trade tensions, a rate cut cycle is in motion for many economies. South Korea is one of them. South Korea’s central bank cut its policy interest rate on Oct 16, as expected, by 25 basis points to 1.25% in a 5-2 vote. Though policymakers are open to further easing, a split vote on the latest move indicates that the next reduction may not be around the corner.
The new rate is in line with the record low set in mid 2016. Interest rate in South Korea averaged 3.13% from 1999 until 2019, reaching an all-time high of 5.25% in October 2000 and a record low of 1.25% in June 2016 (read: Global Policy Easing Cycle Set in Motion: ETFs to Win).
This was the second rate cut in three months, due to mounting deflationary pressures and a slowdown in the economy. Flagging consumption growth and sluggishness in exports have been hurting the economy.
South Korea’s quarterly GDP growth was revised lower to 1.0% in the second quarter compared with 0.4% shrinkage in the previous period. It was the strongest growth rate since the first quarter of 2018. The economy expanded only 1.9% in the first half of this year from a year earlier, down sharply from a 2.5% gain in the second half of last year and a 2.8% rise in the previous six-month period, per Reuters. BOK Governor Lee Ju-yeol indicated that Asia’s fourth-largest economy would likely fall short of the central bank’s latest growth forecast of 2.2% this year.
Going forward, it is forecast that consumer price inflation will miss the path projected in July and will keep swinging for some time at around the 0 percent level, and then run in the one percent range from next year. Core inflation will also rise slowly, per tradingeconomics.
Why Buy South Korea ETFs?
Rate cuts will ensure inflows of cheap money and the resultant rise in the stock market. Also, the United States and China are likely to sign an initial phase of trade deal, which could prove to be a positive over the long term (read: ETF Winners as 'Phase 1' Deal Eases Trade Tensions).
Though all kinds of stocks and ETFs should get a boost from this easing move, currency-hedged ETFs are expected to soar higher. This is because following the latest easing, South Korean currency won is likely to lose strength against the U.S. dollar, which makes currency-hedged ETFs more compelling bets (see all Asia-Pacific (Developed) ETFs here).
ETFs in Focus
Xtrackers MSCI South Korea Hedged Equity Fund
The underlying MSCI Korea 25/50 US Dollar Hedged Index measures the performance of the large & mid-cap segments of the Korean market while at the same time mitigates exposure to fluctuations between the value of the U.S. dollar and the Korean won.
The fund charges 58 bps in fees and is heavy on Samsung which invests about 23.83% weight in it. SK Hynix (5.95%), NAVER Corp (2.85%) and Shinhan Financial Group Ltd (2.53%) are the stocks that occupy the next three spots. The fund gained about 1.8% in the past three months (as of Oct 15, 2019) against 0.3% loss indicated in SPDR S&P 500 ETF (SPY).
iShares Currency Hedged MSCI South Korea ETF (HEWY - Free Report)
The underlying MSCI South Korea 25/50 100% Hedged to USD Index consists of stocks traded primarily on the Stock Market Division of the Korea Exchange with the currency risk of the securities included on the Underlying Index hedged to the U.S. dollar on a monthly basis. The fund charges 59 bps in fees and added about 1.6% in the past three months.
iShares MSCI South Korea ETF (EWY - Free Report)
The underlying MSCI Korea 25/50 Index consists of stocks traded primarily on the Stock Market Division of the Korea Exchange. The 113-stock fund charges 59 in fees. The fund gained about 1.2% in the past three months (as of Oct 15, 2019).
Franklin FTSE South Korea ETF (FLKR - Free Report)
The FTSE South Korea RIC Capped Index is market-capitalization weighted and represents the performance of South Korean large and mid-capitalization stocks. The fund charges 9 bps in fees and holds about 136 stocks in the portfolio. Information Technology (31.48%), Financials (13.40%), Consumer Discretionary (13.32%) and Industrials (10.98%) are the top four sectors of the fund.
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