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

Although South Korea resembled any other Asian country during sixties, its ascend to become the tenth largest GDP in the world has been far from dramatic. Presently, its per capita income is at par with countries in the European Union. Although this growth has been broad based, nowhere it is more pronounced than in the hi-tech semiconductor industry, where the South Korean firms like Samsung, have become world-beaters. The industry as a whole is export driven and caters primarily to markets of Asia, Europe and the U.S


It is no wonder that iShares MSCI South Korean Index (EWW) fund, with considerable investments in semiconductor (20%) and other sectors in this high growth economy managed to give 11% return during the year 2006. Banking sector with 15% and metals and mining with 8% constitute other major investments.


Economic growth in 2006 has been 5%, and the South Korean central bank has pegged the growth rate to be lower at 4.5% for the year 2007. This downturn in economy is going to affect the fund performance too. The country has been enjoying good economic condition for some time now and the local currency “Won” has been strengthening against both dollar and yen. Currently it has reached its nine-year high.


South Korea is largely an export driven economy with 40% of its GDP contribution coming from that area and this strengthening of currency has been affecting its exports severely. With semiconductors forming majority of its export, the prevailing situation in South Korea will affect the industry badly.


The short-term external debt condition of the country has worsened, accounting to 46% of total external debt thereby increasing its fiscal deficit. Yen borrowings by commercial banks to cater to the rising needs of consumers have led these banks to unhedged positions. The financial state of banks are thus in a precarious state. With the path to recovery looking tedious, the fund with 15% exposure to banks does not have anything positive to look forward to.


With such volatile economic condition, both stocks and firms are expected to bear the brunt in the coming days. Thus it is unlikely to expect the fund to repeat its previous year’s performance in 2007.