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ETFs in Focus on Weak South Korea GDP Growth

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South Korea’s GDP unexpectedly contracted in fourth-quarter 2016, as weaker automobile exports overshadowed the increase in semiconductor exports. Moreover, fewer work days owing to the holiday season also weighed on economic growth.

The sudden weakness in GDP was attributed to the high base effect, as third quarter GDP register a seven-year high reading.

Into the Headlines

South Korea’s GDP contracted 0.2% sequentially in the October-December quarter compared with 1.5% in the previous period and missed expectations of a 0.1% increase, per the Bank of Korea. GDP grew 3.0% year over year compared with 3.8% in the previous quarter, missing expectations of a 3.1% increase.

Exports declined 5.4% in the quarter compared with a growth of 6.1% in the prior period. This was primarily due to weak automobile exports. However, private consumption growth increased to 1% compared with 0.8% in the prior quarter.

Moon Jung-hui, an economist at KB Investment & Securities, told Reuters, "The burst of investment and exports we've seen in 2017 won't be sustained this year and will slow down. As the GDP data shows, the good news is that private consumption is picking up, and will support growth this year."

Coming to construction, the government’s move to impose additional mortgage curbs on owners of multiple homes to discourage excessive borrowing weighed on construction investment. It declined 3.8% sequentially.

Moving on to monetary policy, South Korea’s central bank raised interest rates for the first time in more than six years in November 2016. The Monetary Policy Board decided to increase the benchmark interest rate by 25 basis points to 1.5% from a historic low of 1.25%. The central bank of South Korea faced increased pressure to hike rates after the Federal Reserve went on a policy-tightening mode.

Geopolitical Risks

The South Korean economy has been suffering from North Korea’s actions. North Korea has been continuously testing missiles to develop a nuclear program in order to safeguard itself from potential U.S. invasion, per North Korean leader Kim Jong-Un. Kim Jong-un warned the United States of potential nuclear action in case his country is threatened (read: What Does Kim Jong-Un's Speech Hold For Safe Haven ETFs?).

Although bilateral talks over North Korea’s participation in the Winter Olympics has been giving a ray of hope that tensions will ease, latest information from an ex-North Korean spy hints at something else. Kim Hyon-hui thinks that the regime plans to separate South Korea from its ally, United States. Per an NBC News article citing Hyon-Hui’s statement: "North Korea is using the Olympics as a weapon," Kim Hyon-hui said, adding, "It’s trying to escape the sanctions by holding hands with South Korea, trying to break free from international isolation."

Let us now discuss a few ETFs providing exposure to South Korea (see all Asia-Pacific (Developed) ETFs here).

iShares MSCI South Korea Capped ETF EWY

This fund is the most popular in the space offering exposure to South Korean equities.

It has AUM of $4.4 billion and charges 62 basis points in fees per year. From a sector look, Information Technology, Financials and Consumer Discretionary take the top three spots, with a 35.3%, 15.0% and 12.4% allocation, respectively (as of Jan 23, 2018). Samsung Electronics Ltd, Sk Hynix Inc and Posco are the top three stocks with 19.5%, 4.7%, and 3.2% allocation, respectively (as of Jan 23, 2018). The fund has returned 40.9% in a year.

AdvisorShares KIM Korea Equity ETF KOR

This fund seeks to offer exposure to South Korean growth equities in the mid-to-large cap segment.

It has AUM of $10.9 million and is relatively expensive as it charges 99 basis points in fees per year. From a sector look, Information Technology, Consumer Discretionary and Industrials take the top three spots, with 35.0%, 19.0% and 13.0% allocation, respectively (as of Dec 31, 2017). Samsung Electronics Co Ltd, NAVER Corp and Hyundai Motor Co are the top three stocks with 18.9%, 4.8% and 4.7% allocation, respectively (as of Dec 31, 2017). The fund has returned 31.2% in a year.

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