The Korea Stock Exchange sits prominently on Yeouido Island in the Han River in Seoul. The prominent locations masks years of disappointment in the performance of Korean equities.
Korean equities have significantly underperformed U.S., European, Japanese, and Chinese stocks over the past few years. Research and in-country conversations are pointing to two culprits—slowdown in China and the weakening Japanese Yen.
Korean equities have recently accounted for 1.5% to 4% of global market capitalization. This puts South Korea in the top 10 of countries ranked by market capitalization. So much of the debate among investors has centered on whether to consider South Korea as a developed market or as an emerging market. We have considered South Korea a developed market, and my visit to Seoul only reinforces this notion. However, the MSCI Emerging Markets Index (tracked by ETF Ticker: EEM), has nearly a 15% allocation to Korean equities. The FTSE Emerging Market Index (tracked by ETF Ticker: VWO) does not include South Korea. Instead, FTSE includes South Korea in its Developed Market Index (tracked by ETF Ticker: VEA), where South Korea accounts for roughly 4%.
No matter how you categorize South Korea, its financial market performance has struggled. Even the benefit of lower oil prices failed to lift markets higher. South Korea’s huge reliance on exports (43% of GDP) makes the country very leveraged to global growth. This makes currency rates very material in the eyes of Korean policy makers and Korean financial markets. Policy makers are changing the major Korean equity benchmark (away from the Kospi 200) and increasing the band to 30% for daily stock moves all in an effort to revive trading volumes. Korea Exchange volume has dropped in recent years (6.9 trillion Won traded in 2011 dropped to 4 trillion Won traded on the exchange in 2013).
The Bank of Korea has cut rates in an effort to spur investment and weaken the Korean Won (policy rates stand at a record low of 1.75%). Bank of Korea Governor Lee Ju-yeoul has left the door open to further easing, and he recently suggested that sluggish growth in China and a weak Yen were “causes for concern.”
Policy makers in Korea are explicit about the fact that they worry about an impact of a weak Yen:
Headlines related to Korea echo the discussions that I have had in-country. Here are a few examples:
Special thanks to Brennan Staheli, Evan Fiala, and the Lunt Capital team for their contributions to this report.