Korea
On the auspicious date of Friday the 13th of December 2024, I published “4 Stock Market Perspectives”(https://kotokreport.com/4-stock-market-perspectives/). Readers are thanked for their comments. Today, let’s add to that discussion.
First, I want to clarify the reference from Bryan Taylor about the equity risk premium. A reader stated, “His forecast was wrong.” I pointed out that, in fact, it was correct and that the piece by Taylor is dated. It was published on February 5, 2020, just in advance of the Covid market swoon and recovery. What is important to glean from the Taylor piece is that the variability in ERP over time is large. And, equally important, ERP eventually has mean reversion. That is why ERP cannot tell you what to trade on a specific date. It can and does give guidance about the degree of strategic risk an investor is taking.
Let’s move on.
The South Korean stock market has been thrashed. One can see this by examining the trading range of the ETF used to capture the South Korea market. The symbol is EWY. The midsummer high was about 68, and the recent low was about 51 (year-end).
Let me make immediate disclosures. I personally own positions in this market, and they are tied to this ETF.
Here’s a chart from CNBC showing last year’s price movement in EWY.
South Korea has suffered from extraordinary political disruption. An overnight declaration of martial law by President Yoon Suk Yeol on Dec. 3 prompted intense public demonstrations against his act, his retraction of the declaration, and then his impeachment by the National Assembly on Dec. 14 (“The Impeachment of South Korea’s President, Explained,” https://www.nytimes.com/2024/12/14/world/asia/south-korea-impeachment-yoon-explained.html ). Then came a second impeachment, of his successor, followed by an attempted arrest and internal political strife.
All this frantic activity combined to cast a cloud over this country’s economic outlook and stock market. The best estimates we see indicate that the entire capital-market pricing of South Korea as a total stock market is now lower than its book value. For comparison, the US using SPY is over 5 times book value (Source: Torsten Slok-Apollo). I have not checked company by company to see if the EWY basket of companies is priced close to net cash. Let me leave that to security analysts to do that for themselves.
EWY is described by CNBC this way: “The Fund seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the South Korean market, as measured by the MSCI Korea Index.” Is EWY a bargain? Well, that’s up to the observer. At yearend, its dividend yield was 5.8%. The ten largest holdings as of Jan. 3, 2025 are:
Samsung Electronics Co. Ltd. 22.43% of total net assets
SK Hynix Inc. 8.34%
KB Financial Group Inc ORD: 3.52%
Hyundai Motor Co. Ltd. 2.93%
Celltrion, Inc. 2.80%
NAVER Corporation 2.66%
Shinhan Financial Group Co., Ltd. 2.26%
Kia Corporation 2.21%
POSCO Holdings Inc. 1.97%
Hana Financial Group Inc. 1.79%
Note that Samsung and SK Hynix combined are about 30%. So, the performance of this ETF will be driven in a large part by those two companies. Samsung, you know. And note that it has a large chip making facility under construction in the US. SK Hynix just announced a new 12-layer chip that is an exceptional development in a world where chips and AI are dominating global stock markets (“SK Hynix Begins Volume Production of the World’s First 12-Layer HBM3E,” https://news.skhynix.com/sk-hynix-begins-volume-production-of-the-world-first-12-layer-hbm3e/ ).
I would like to add that South Korea has an independent central bank and a monetary policy that is oriented toward keeping inflation contained and maintaining financial stability. For details see the BOK website: https://www.bok.or.kr/eng/main/main.do .
The functioning democracy in South Korea began in 1987 after a military government was replaced (“[Korean History] June 1987: Democracy takes root, at least in the Constitution,”https://www.koreaherald.com/view.php?ud=20230524000525). There had been many episodes of martial law in the country’s 80-year history since its founding in 1948 (“Long before this week, South Korea had a painful history with martial law,” https://www.npr.org/2024/12/05/nx-s1-5215788/south-korea-martial-law ).
So, the market may be pricing stocks in the country at a deep discount because of political risk. Or it may be that the war threat from neighboring North Korea is intensifying with the Russia–North Korea relationship now including NK troops in Ukraine. There are certainly reasons for concern, but they have been there for a long time. Note that the Korean War of the 1950s ended with a ceasefire, but no formal peace treaty has ever been concluded between North and South Korea (“70 Years After the Armistice, the Korean Peninsula Still Struggles for Peace,” https://www.usip.org/publications/2023/09/70-years-after-armistice-korean-peninsula-still-struggles-peace ).
I am not recommending EWY in this commentary; I am disclosing my personal position.
