24 October 2016
The South Korean market is outperforming its counterparts in the region. Photo: Reuters
The South Korean market is outperforming its counterparts in the region. Photo: Reuters

South Korea ETFs attractive amid weak HK, China stock markets

Because of the uncertain outlook of the Hong Kong and China stock markets, some investors are switching their attention to international markets.

The exchange traded fund (ETF) offers a good platform to invest in these markets.

There are 42 Asia-Pacific equity ETFs listed in Hong Kong, accounting for about 32 percent of the total number.

Some are invested in tourism destinations favored by Hongkongers, like South Korea, Japan, Taiwan and Singapore.

Why not have a look at their equity markets while planning for your next vacation?

Among Asia-Pacific equity markets, the KOSPI index of South Korea fell only 2.3 percent between Jan. 1 and Jan. 13, outperforming other stock markets in the region.

Although North Korea’s recent nuclear test has cast a shadow on the market, its real impact is limited.

The South Korean market is attractive because of improving corporate earnings.

A Morgan Stanley report forecasts that the operating profit and net profit per share of South Korean companies in the fourth quarter last year rose 25 and 34 percent respectively from a year ago. 

KOSPI’s profit before tax fell 6 percent from 7.7 percent in the third quarter last year.

With negative factors fading away, I believe earnings will continue to increase in the following quarters.

Meanwhile, the Korean won remains weak, which is good news for exporters.

The projected earnings per share of KOSPI is 10.6 times and the price to book value is 0.91 times. Such valuations have priced in the weak expectation for the last quarter.

The Morgan Stanley report noted that even if EPS growth is flat in the fourth quarter last year, KOSPI will not collapse and the downside risk is under control, making the stocks attractive.

There are four major risk factors that investors must consider. First of all, the household debt level and its quarterly growth are at their historical highs. Investors should see if there is an improvement.

Second, there’s a highly centralized decision-making process and a male-dominated corporate culture in South Korean companies. Such a situation may affect the companies’ performance.

Third, there is monopoly in many industries. The country’s largest electronics company is far bigger than its competitors and weighs about 20 percent in the KOSPI. 

The poor results of a single company will affect the overall market.

Lastly, investors have to be aware of the foreign exchange risk. If the won becomes weaker, investors need to hedge the risk.

There are four South Korean equity ETFs listed in Hong Kong that are tracking various indexes.

Those tracking the KOSPI and MSCI indexes are suitable for investors who want to follow the overall market performance, while the value-type South Korean ETF is good for those seeking a higher return than the market average.

This article appeared in the Hong Kong Economic Journal on Jan. 19.

Translation by Myssie You

[Chinese version 中文版]

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Associate Director at Value Partners Limited

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