Investing on Headlines – Investment Ideas on Korean Peace Prospects

Tensions between South Korea, North Korea and the United States have been making headlines ever since President Trump took over the Whitehouse. In fact, in what would seem like an eternity, analysts believe that South Korean stocks have always been trading at a war-discount to stocks in neighboring countries of the Asia Pacific region.

Korean, South Korea, South Korean stock index (KOSPI)

A look at the South Korean stock index (KOSPI), from Jan and Feb of this year, paints a rather dismal picture for investors. The ups and downs that you see here were, in large part, due to the missile tests conducted by North Korea. Those hostile acts not only sent chills down the spines of South Koreans, but also through portfolios that were South Korea-heavy!

Inflection Point

But something happened in early March 2018. On March 8th, President Trump telegraphed a softer stance towards North Korea.  Signaling that the U.S would be open to dialogue (and perhaps even a meet!) with the renegade nation on its nuclear future. That simple gesture seems to have been an inflection point for South Korean investments.

So, what really happened?

Well, to illustrate that point by analyzing more than just the index, lets take a portfolio-view of the impact. We’ll look at two ETFs that represent a basket of multiple stocks. MSCI South Korea ETF (EWY) and FTSE Pacific ETF (VPL).  We’ll tell you more, about why we choose these two to illustrate our point, later.

MSCI South Korea ETF (EWY), FTSE Pacific ETF (VPL)

From the period prior to the Trump announcement, to the point just prior to developments that actually lead to a meeting of the leaders of the two Koreas (on April 27th).  These ETFs have been doing a lot of meandering, but going nowhere very fast. However, that changed over the past few days!

MSCI South Korea ETF (EWY), FTSE Pacific ETF (VPL)

As word got out that the two Koreas could actually come to peace, and that South Korea (and perhaps the North too) might supercharge its economic growth in a climate of no hostilities.  Investors started piling into both these names. As the upticks in both ETFs indicate, investors seem to believe that South Korean investments will no longer be discounted.

Getting a Piece of The Korea Peace Play

Before we talk about the play involving these two names, lets talk more about what these two ETFs represent.

MSCI South Korea ETF (EWY) is an iShares product that is designed to closely track the performance of an index composed entirely of South Korean equities. So, why would you gravitate to an ETF that is concentrated in South Korea? Three simple reasons:

  • Firstly: You get exposure to an array of large and mid-sized equities in a single product
  • Secondly: The exposure is targeted to South Korea only
  • Thirdly, and most importantly: The equities in this ETF are Blue-chip South Korean entities, like:
    • Samsung Electronics (Info Tech)
    • Hyundai (Consumer Discretionary)
    • LG Chemicals (Materials)
    • Celltrion (Health Care)
    • KB Financials (Financials), amongst others.

And you can do this through a low Expense Ratio of 0.62%.

We’re comparing EWY to Vanguard’s FTSE Pacific ETF (VPL), a product designed to give investors exposure to a much broader (compared to EWY) index of stocks representing the whole of the Asia Pacific region (including South Korea). Holdings in this ETF include companies like Toyota Motors (Japan), Commonwealth Bank of Australia, and others representing New Zealand, Singapore and Hong Kong (as well as a few from South Korea). With an Expense Ratio of just 0.10%, this ETF is pretty low-cost too.

If you believe that the two Koreas could embrace peace, and you want a piece of the Korean peace play, then you should consider EWY as your investment of choice. Heavily South Korea weighted, you will have more torque to the peace initiatives with EWY than you will with VPL. However, if diversification is your game, then VPL offers a much better investment thesis for you.

Author does not own any of the stocks discussed in the article