Strong Won to Boost Korea ETFs
Posted 12/11/2009 12:29 p.m. EST A stronger yen and weaker won are a positive divergence for South Korea, giving its exporters a leg up against Japanese rivals, and helping them stay competitive with China. But a stronger won would be better news for investors in iShares MSCI South Korea (EWY).
Over the past five years, the South Korean won has underperformed the euro, the yen, the Brazilian real, the Taiwan dollar and the Chinese yuan against the U.S. dollar. The won stayed undervalued thanks to South Korea's relative weakness during this decade's early boom. It then followed the plunge in emerging-market currencies amid the panic of 2008. Against the dollar, the won has depreciated by around 10% in the past five years, while the Taiwan dollar was flat, the euro gained 10%, the yen rose 15%, as did the yuan, and the real surged 35%.A weaker currency has made South Korean exports more competitive, and this has helped the country's exporters capture market share in emerging economies. Bloomberg recently reported that exports to emerging markets have grown from 49% in 2000 to 71% of total exports today. While positive for South Korean business, the weaker won hasn't helped foreign investors. In the past three years through Dec. 9, the won fell 20% against the dollar, and contributed to EWY's annualized 0% return. Meanwhile, the real gained nearly 20% against the dollar, and the iShares MSCI Brazil (EWZ) gained an annualized 22%. Recently, the won has started to recover. Over the past three months, it has been the strongest of the aforementioned currencies against the greenback. Unless the South Korean government intervenes to weaken its currency, the won should continue to benefit from economic growth, and it has room to rise before it begins to hurt export competitiveness. Investors can overweight South Korea by adding EWY to their portfolio, or choose a regional ETF, such as iShares MSCI All Country Asia ex-Japan (AAXJ), which allots 18.3% of its portfolio to South Korea. China (17.6%), Taiwan (14.3%) and India (10.3%) also rank among its top holdings.
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