ETF XRAY

South Korean ETF Needs More Financial Reforms

By Carl Delfeld of the Chartwell ETF Advisor

The iShares Korea exchange-traded fund's (EWY) trading pattern is unfortunately starting to look a bit like Japan's. The ETF's top three holdings, Samsung, Posco and Kookmin Bank, account for 30% of assets and all face some market headwinds.

But the key constraint to higher South Korea economic growth and a bull market is its over-regulated financial sector.

Late last year, the "Capital Markets Integration Act" came into effect and could be a building block for more significant reform. While South Korea’s banking sector was liberalized a decade ago, many financial markets were off limits to foreign institutions. South Korea sees the moves of countries like Singapore to become a regional financial services hub, and this legislation is aimed at keep up with the competition.

Should South Korea have a place in your global portfolio? Go to Chartwell ETF to find out.

The most significant part of the act, which will take effect in January 2009, is the move from a positive list system of regulation--under which everything that is not allowed is prohibited--to a negative list, meaning financial groups can do anything that is not expressly prohibited. Some are comparing the changes with the "big bang" in London 20 years ago.

The legislation also gives more running room for asset managers to develop new and more sophisticated products as well as permitting brokerages to provide customers with a wide variety of financial services. If South Korea can build on its strong industrial and tech foundation and broaden into a financial services powerhouse, it should have a significant impact over time. The reforms will also improve disclosure and transparency and help prevent conflicts of interest.

But some believe that the legislation does not go far enough and that South Korea needs to be much friendlier to foreign financial firms to attract the talent and resources necessary to put Seoul on the global financial map.

South Korean ETF Held Back By Financial Issues

By Carl Delfeld of the Chartwell ETF Advisor

The iShares Korea exchange-traded fund's (EWY) trading pattern is unfortunately starting to look a bit like Japan's. The ETF's top three holdings; Samsung, Posco and Kookmin Bank account for 30% of assets and all face some market headwinds.

But the key constraint to higher South Korea economic growth and a bull market is its overegulated financial sector.

Late last year, the "Capital Markets Integration Act” came into effect and could be a building block for more significant reform. While South Korea’s banking sector was liberalized a decade ago, many financial markets were off limits to foreign institutions. South Korea sees the moves of countries like Singapore to become a regional financial services hub and this legislation is aimed at keep up with the competition.

The most significant part of the act, which will take effect in January 2009, is the move from a positive list system of regulation - under which everything that is not allowed is prohibited - to a negative list, meaning financial groups can do anything that is not expressly prohibited. Some are comparing the changes to the "big bang" in London twenty years ago.

The legislation also gives more running room for asset managers to develop new and more sophisticated products as well as permitting brokerages to provide customers with a wide variety of financial services. If South Korea can build on its strong industrial and tech foundation and broaden into a financial services powerhouse, it should have a significant impact over time. The reforms will also improve disclosure and transparency and help prevent conflicts of interest.

But some believe that the legislation does not go far enough and that South Korea needs to be much friendlier to foreign financial firms to attract the talent and resources necessary to put Seoul on the global financial map.

Another issue in these times of financial uncertainty is that Korean banks are structurally more vulnerable to credit issues than their Asian counterparts. Unlike their peers, they lend more than they attract in deposits. This is especially important since in 2007 as savers switched funds out of banks, partly as a result of deregulation, and lending volumes jumped. Last year loan/deposit ratios stood at around 120 per cent. The Financial Times notes that Korean won deposits, which made up 64 per cent of liabilities in 2003, fell to just 50 per cent by the third quarter of 2007, according to Credit Suisse.

This increasing reliance on capital market funding plus keen competition for deposits, has raised financing costs and probably depressed bank profit margins as well.

The South Korean market is trading at about 12 times forward earnings according to S&P data.

To learn more about South Korea and other Asia-Pacific markets, go to Chartwell ETF.

South Korea's New President and ETF

By Carl Delfeld of the Chartwell ETF Advisor

While concern mounts about South Korea's real estate sector, investors in its iShares exchange-traded fund (EWY) should welcome the country's newly elected president, Lee Myung-bak.

He advocates closer links to Washington and a tougher approach to Pyongyang. He is pledging a more welcoming environment for foreign investors by cutting red tape, clamping down on labour unions and accelerating bank privatisation. Promoting economic growth is his top priority.

The Financial Times reports that Mr. Lee won over 50% of the vote in a field of 10 candidates, and this underlines the extent to which Koreans are looking for a shift in policy orientation after a decade of left-wing rule. During the campaign he pledged to create a “747” economy: 7 per cent annual growth; more than doubling annual per capita income to $40,000; and making Korea the world’s seventh-largest economy, up from 11th or 12th now.

South Korean Election and ETF

By Carl Delfeld of the Chartwell ETF Advisor

It is a foregone conclusion that Mr. Lee Myung-bak, the former Mayor of Seoul and construction magnate is going to win South Korea’s presidential election on December 19th. The question is what does this mean for the Korean economy and the iShares MSCI South Korea exchange-traded fund? (EWY)

Given his pro-business, tax cutting agenda, the election of Mr. Lee is likely to be perceived as a plus for the Korean stock market which has been one of the best performers this year.

But the country is unsettled and apprehensive about economic prospects. Squeezed between, Japan, China and Russia, it lacks the confidence and security to fully embrace a market economy. Labor and real estate values have risen to uncomfortable levels. It’s growth rate has slipped a bit and while a 4.5% average annual growth rate is nothing to sneeze at, faster growing countries like Brazil and India have pushed the country back from the 11th- largest economy in the world to the 13th slot. In short, it needs some mojo.

Together, Samsung, POSCO, KEPCO (Korea Electric Power) and SK Telecom account for almost 50% of South Korean stock market’s market capitalization and roughly the same proportion in the basket of South Korean companies that are contained in the MSCI iShares South Korean ETF (EWY).

Over the past 52 weeks, EWY has moved from $45 to $75 but has pulled back to $65.

For a full analysis of South Korea and its stock market, go to the Chartwell ETF Advisor.

Is Hot Korean ETF (EWY) Still Cheap?

By Carl Delfeld of the Chartwell ETF Advisor

South Korea's benchmark Kospi index and the MSCI iShares (EWY) exchange-traded fund that tracks it is the third-best performing mainstream ETF so far this year. Up 29.6% through last Friday, EWY has only been bested by China and Thailand. The key question is whether the market is still attractive from a valuation perspective. It seems still cheap - Korea trades at a 24 per cent discount to the region on a price-to-book-value basis.

As the Financial Times point out, foreign investors have plenty of reasons to be wary about putting their money into South Korea. Asia's third largest economy is becoming an increasingly volatile place to do business - rules are changed retrospectively, tax treaties ignored, and the legal framework can be ignored when nationalism directed at foreign enterprises catches fire.

Recent gains have been largely fueled by Korean investors, foreign investors have been selling. Find out five reasons why and whether you should follow the locals or fund managers sitting in front of laptops in New York, Boston and London. Click here for more.

Japan Holds Rates Steady, South Korea Hikes

The Bank of Japan earlier today announced that it left its overnight rate unchanged at 0.50%, which was in line with most market analyst predictions. It will also perpetuate the robust carry trade which has kept the yen weak. The market is not expecting a rate hike until later this year and not until inflation starts to rise and the risks for deflation recede.

Meanwhile, the trend toward higher global rates was underlined again earlier today when South Korea's central bank raised its benchmark rate by 25 bp to 4.75%. The market had been split regarding the this rate hike which will tighten the money supply and credit growth. Higher housing prices and a stronger than expected economy and stock market tracked by the exchange-traded fund (EWY) gave monetary officials the leeway to raise rates without fear of killing economic momentum and growth. Markets have responded favorably with EWY up 2.5% in midday trading while the iShares Japan ETF (EWJ) is flat.

My view is that Japan should have followed Korea and raised rates and that higher rates would be good for its economy and stockmarket. It would demonstrate confidence in the Japanese economy which is sorely lacking by officials, executives and consumers.

Overseas stocks markets today were mostly higher, except for the Nikkei index which closed down slightly. China's Shanghai Composite closed +0.71% and Hong Kong closed +0.89%. The European DJ Stoxx 50 index this morning is just barely higher.

Posted by Carl Delfeld of the Chartwell ETF Advisor

iShares MSCI South Korea Index (EWY) Stays in Demand

EWY – iShares MSCI-South Korea Index Fund continues to maintain its healthy demand status. The top ten positions make up nearly 50% of the assets with Samsung at the top with 15.37%. Trading well above its bullish support level of $37 EWY is also valued above both its 50 day ($57.08), and 200 day ($50.65) moving averages.

(Click image for larger view)

By DE Smith of MyPortfolioView

Korea's Big Bang and ETF

The South Korean stock market and exchange-traded fund (EWY) which is doing quite well this year and is in Chartwell's Asian Opportunity ETF Portfolio should benefit from substantial capital markets deregulation to be signed into law later this week. While its banking sector was liberalized a decade ago, many financial markets were off limits to foreign institutions.

Anna Fifield of the Financial Times reports that the most significant part of the act, which will take effect in January 2009, is the move from a positive list system of regulation - under which everything that is not allowed is prohibited - to a negative list, meaning financial groups can do anything that is not expressly prohibited. Some are comparing the changes to the "big bang" in London twenty years ago.

"This does have the potential to move the Korean financial system to the next level of development," said Meral Karasulu, the International Monetary Fund's representative in Seoul. "A key change the law will bring is the move from a positive regulatory list to a negative one, creating room for new product development and innovation in general and potentially generating the competition needed for consolidation."

The impending legislation will also give more running room for asset managers to develop new and more sophisticated products as well as permitting brokerages to provide customers with a wide variety of financial services. If South Korea can build on its strong industrial and tech foundatiion and broaden into a financial services powerhouse, it should have a significant impact over time.

Posted by Carl Delfeld of the Chartwell ETF Advisor

Samsung Dominates Top Heavy Korea ETF (EWY)

Samsung Electronics which represents 24% of the Korean exchange-traded fund (EWY) which has come alive this year after trailing other Asian markets over the past few years and was up 1.92% yesterday alone. It has become Asia’s largest technology company by market cap (larger than Sony), and its largest maker of memory chips and flat panel screens and mobile phones. Samsung enjoys a credit rating higher than South Korea’s sovereign rating. With 62 affiliates, the Samsung group dominates life in Korea like no other company in history. It represents 15% of the nation’s total economic activity, 25% of the capitalization of the KOSPI stock market and the taxes it pays represent almost 10% of total government income!

But the company is not a terrific play on the South Korean economy. Rather it is a global play on its three key markets and the expected payoff from its extraordinary commitment to R&D. The South Koreans are discontented because the five largest companies are growing outside the country more than in it and at a stage of development where it should be more competitive manufacturing onshore. The challenge is the low cost manufacturing platform with huge economies of scale just next door – the issue is China. Samsung already has already has 29 plants and 50,000 workers in China.

Since China is already starting to manufacture stuff like machine tools that the South Koreans were busily exporting in 2003 and 2004, South Korean planners believe it must quickly transform itself into a finance, communications and transportation hub – akin to the role of Singapore or Switzerland. The question then becomes does it have the right companies, the right skills and what is its competitive advantage?

Together, Samsung, POSCO, KEPCO (Korea Electric Power) and SK Telecom account for almost 50% of South Korean stock market’s market capitalization. To use a basketball analogy, the South Korean starting five are strong but its bench is a bit thin and its team has lost the home court advantage. The problem is not Samsung but rather that they need about ten more Samsungs.

The top four companies also make up 40% of the South Korea iShare (EWY) ETF which is up 29% so far this year. Samsung alone accounts for 23% of this ETF and buying the iShare gives you more exposure to the top ten South Korean companies. A stronger won and higher interest rates might lead to slower growth and the likely re-emergence of the North Korean problem may very well undermine investor confidence but the momentum of the market may offset some of these risks.

Earlier this year we increased exposure to South Korea in some of Chartwell's ETF Portfolios. after seeing that it was attractive on a relative valuation basis.

By Carl Delfeld of the Chartwell ETF Advisor

iShares MSCI South Korea Index (EWY)

Dave Mock of “The Motley Fool” comments on a weakness of South Korea’s exchange traded fund (EWY). He says “since the iShares ETF is heavily weighted by one stock -- Samsung, which makes up almost one-quarter of the fund -- investors may not get the exposure to other Korean companies they desire. For an investor who was, say, really hip to steel manufacturers in the region but not so sure about Samsung's growth going forward, this ETF wouldn't fit the bill.” Looking beyond the 25% allocation in Samsung EWY has had a great 2007 moving from $49 to $60 for a 22.45% gain YTD.

EWY is trading well above both its 50 and 200 day moving averages.
50 DMA: $54.53 | 200 DMA: $49.52.

(Click image for larger view)

ECONOMY: In recent years, Korea’s economy moved away from the centrally planned, government-directed investment model toward a more market-oriented one. Korea bounced back from the 1997-98 Asian financial crisis with some International Monetary Fund (IMF) assistance, but based largely on extensive financial reforms that restored stability to markets. These economic reforms, pushed by President Kim Dae-jung, helped Korea maintain one of Asia’s few expanding economies, with growth rates of 10% in 1999 and 9% in 2000. The slowing global economy and falling exports slowed growth to 3.3% in 2001, prompting consumer stimulus measures that led to 7.0% growth in 2002. Consumer over-shopping and rising household debt, along with external factors, slowed growth to near 3% again in 2003. Economic performance in 2004 improved to 4.6% due to an increase in exports, and remained at or above 4% in 2005 and into 2006.

DE Smith of MyPortfolioView

iShares MSCI South Korea Index (EWY)

(Click image for larger view)

South Korea’s ETF is up 14.68% YTD and 24.85% since January 2006. When any investment produces these kinds of returns in such a short period of time its good to begin thinking about a defensive strategy. The bottom chart shows EWY in May 2006 hitting its all time high of $53 and then falling back to $40 in just over a month. That’s a serious correction of -24.53%. Could it happen again? Of course it could happen and sooner or later may. If you own a position in EWY a chart like the one above can help you spot any shift in the overall value of the position.

BY DE Smith of MyPortfolioView

iShares MSCI South Korea Index (EWY)iShares MSCI South Korea Index (EWY)

Nuclear Deal Helps South Korea ETF

The announcement of the North Korean nuclear deal has buoyed the South Korean exchange-traded fund or ETF (EWY) which was up 1% in mid-day trading.

The South Korean ETF (EWY) and market has essentially gone sideways following strong returns in 2003, 2004 and 2005. So far in 2007, EWY is down 4.3%. Today the market is again one of the cheapest in the region, with a strong currency, reasonable earnings growth and strong economic ties with China not to mention solid 4-5% GDP growth. But a more bureaucratic and pie slicing government has put off investors – especially foreign investors. The business community is eagerly awaiting the upcoming presidential election in December and a new president a year from now.

While the Bush Administration is referring to the Korean agreement as a "landmark" breakthrough, Forbes Asia columnist Carl Delfeld is critical since the deal is too narrowly focused on power plants and does nothing to prevent the development of nuclear fissionable material and that, furthermore, aid payments will be made on promises, not action, by the North Korean Government.

South Korean ETF Postcard

By Carl Delfeld of the Chartwell ETF Advisor

The South Korean ETF (EWY) and market has essentially gone sideways following strong returns in 2003, 2004 and 2005. Today the market is again one of the cheapest in the region, with a strong currency, reasonable earnings growth and strong economic ties with China not to mention solid 4-5% GDP growth. But a more bureaucratic and pie slicing government has put off investors – especially foreign investors. The business community is eagerly awaiting the upcoming presidential election in December and a new president a year from now.

The Matthews fund family gives its perspective on where South Korea has come from and where it is headed and asks why it is still considered an emerging market. The South Korean KOSPI index was up 1.3% this week but is down 1% so far in 2007.

Southeast Asian ETFs Boosted by Rising Output

Asian ETFs such as the South Korean ETF (EWY), Singapore ETF (EWS), Indonesian ETF (IF), Malaysian ETF (EWM), Taiwan ETF (EWT), India ETF (IIF) and the Philippines are all benefiting from a surprising trend in global manufacturing.

In eight months Intel has committed as much money to Vietnam as it had to China during the previous ten years. In Malaysia, Flextronics has ramped up the production lines of a new M$400m ($110m) factory to make computer printers for another American firm, Hewlett-Packard and in Indonesia, Yue Yuen, a Hong Kong-based shoemaker, has been rapidly increasing its footwear for brands like Nike and Adidas.

All of these developments are highlighted in a current Economist article that describes how South East Asian countries, rather than being hurt by Chinese growth, are being helped by it. Taken together, South Korea, Taiwan, India and the Association of South-East Asian Nations (ASEAN) increased their share of global manufacturing from less than 7% to more than 9% in the decade to 2003. Exports also rose across the board.

Interestingly, only the United States and Canada saw their shares of global output rise—with just over a quarter between them. Most things nowadays might seem to be made in China, but North America remains the true workshop of the world. American manufacturing output leads the world and is twice its nearest competitor,
Japan.

As the Economist article points out, costs are only part of the equation. Just as important is diversification. Having already moved a big chunk of their production to China, many firms are reluctant to put any more of their eggs in the same basket.

Chartwell ETF Advisor’s Asian Opportunity ETF portfolio holds many of the ETFs discussed in this post.
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