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Success of Leveraged South Korea ETF Hinges on US-China Trade Deal

This article was originally published on ETFTrends.com.

Without a doubt, the fate of emerging markets in 2019 could hinge on the United States and China finally putting to rest their trade differences with a tangible agreement, but for single-country exchange-traded funds (ETFs) like the  Direxion Daily South Korea Bull 3X ETF (KORU) , its fortunes could change dramatically as wells as benefit traders of KORU.

South Korea itself is rife for foreign investment as it boasts Asia's fourth largest economy based on gross domestic product and in terms of political stability, it's situated in the top 28 percent of the Corruption Index published by Transparency International. Nonetheless, trade wars continue to be a challenge--something the country forecasted in the early beginnings of the trade spat between China and the US.

“South Korean exporters depend heavily on China and the US. It will be one of the hardest hit economies in the world if an all-out trade war breaks out,” said Kim Yun-hee, a senior trade commissioner from the Korea Trade-Investment Promotion Agency (KOTRA) back in July. “Many of these companies will be hit indirectly because they sell intermediate goods to China and are linked to US companies in China."

Over the summer, the South China Morning Post reported that the impact of the tariff-for-tariff battle between the US and China would cause South Korean exports to drop by 6.4 percent or $36.7 billion based on numbers provided by the Korea International Trade Association (KITA).

Two months later, an article in the Nikkei Asian Review reported that South Korean trade minister Kim Hyun-chong said the country experienced its biggest fall in exports in the last two years--a sign that the proposed impact of the trade wars was indeed coming into fruition.

"If the U.S.-China trade war is not solved within this year, it will inevitably affect our exports negatively," said Park Hee-chan, an economist at Mirae Asset Daewoo. "Still, it is not easy to measure the impacts in numbers, but I am sure that global trade will be under downside pressure."

The capital markets got a reprieve from the ongoing trade wars between the United States and China as U.S. President Donald Trump and Chinese president Xi Jinping agreed to cease fire on their tariff-for-tariff battle last week. As part of the agreement, both nations agreed to withhold imposing further tariffs on each other for 90 days while they work out a firm, ironclad deal to start 2019.

In the meantime, the troubles are mounting for South Korea as The Malaysian Reserve reported that unemployment in the country is on the rise. According to the report, "while minimum wage in the country has increased by 16% at the turn of this year and boosted domestic consumption, President Moon Jae-in’s policy has backfired as small businesses struggle to afford the mandatory wage hikes. As a result, workers are laid off to maintain costs."

South Korea will certainly be watching how trade deal negotiations unfold as will the rest of the emerging markets--a permanent trade deal could certainly give the country and KORU the boost it needs.

Related: South Korea ETF: A Buy the Dip Opportunity

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