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South Korea ETF

Written By Brian Hicks

Posted November 9, 2009

Sometimes, eating bugs is good for business.

At least that’s the case in Seoul, South Korea, where two years ago I found myself biting reluctantly into a spoonful of beondegi. That’s the Korean name for silkworm pupae that are sold like peanuts on sidewalks outside skyscrapers in the country’s capital. I wondered how deals could get done with the air stinking of stewed insects. . .

But now, judging by South Korea’s economic performance in 2009, I’m thinking Wall Street suits may want to start cooking up some creepy crawlers for themselves.

Korea (as I’ll refer to it here, since North Korea produces nothing but nukes and fake Viagra), logged a surprising increase in Gross Domestic Product in the third quarter of this year. Its economy grew by 2.9% from Q2 to Q3, when the International Monetary Fund only expected a 2.1% uptick.

In turn, the IMF has revised its full-year 2009 outlook for the #4 economy in Asia to -1% instead of -3%, and South Korea is now favored over regional neighbors like Japan, China, and Australia to perform solidly in 2010.

Most strikingly, South Korea’s economy is rebounding faster than any other country in the Group of Twenty leading industrialized nations (G20).

That advantage bodes well for U.S.-based investors who tap the iShares MSCI South Korea Index ETF (NYSE:EWY).

Yet EWY isn’t the whole story. Market watchers in other countries should note that even though the EWY exchange-traded fund is most easily accessible to Americans, the benefits of South Korea’s market momentum over the next year may be felt most outside the U.S.

Which brings us back to bugs. . .

Growing KORUS and Korea’s Free Trade Agreements

I walked through desolate downtown Seoul one evening, trying to find a pocket of air that didn’t smell of beondegi. I was blocked in every direction by police cordons and that unfriendly odor. Throngs of Korean farmers had taken to the streets to protest the Korea-U.S. Free Trade Agreement.

As they rallied — munching on crunchy, warm bugs from foam cups — a few even threw bricks at the buses that brought in over 20,000 police officers and soldiers who lined the thoroughfares. Some signs read "NO FTA" in English, but otherwise this was a demonstration aimed squarely at Korean policymakers.

This is how the scene looked:

South Korea protests

KORUS, as this FTA is called in D.C. shorthand, will phase out trade barriers and leave Korea’s ports wide open to U.S. agricultural products with minimal or no tariffs to get in the way.

It has yet to be ratified by the Korean National Assembly or the U.S. House of Representatives, even though the executive-level ink has been dry since 2007.

Korea’s head honchos on trade aren’t waiting idly for Congress to come calling. South Korea already has free trade agreements with 16 countries; the European Union joined that list in October.

Other countries and economic zones from Peru to the Persian Gulf are also on track to open up to Korea, as they recognize we may soon see a repeat of the "Miracle on the Han River"—the period named for the waterway that flows through Seoul and the exponential economic growth that post-war Korea enjoyed from the 1960s through the 1980s.

That experience gives South Korea credibility to help guide the world’s financial leaders to growth.

It’s a good thing, then, that South Korea will hold the rotating chair of the G20 in 2010 and host the G20 Summit next November.

This month, Barack Obama will stop in Seoul after the Asia-Pacific Economic Cooperation (APEC) meeting in Singapore and his visits to a handful of Asian countries. The 21-member APEC conference will provide a forum for South Korean President Lee Myung-Bak to strategize with the U.S. President about how both leaders can drive ratification of KORUS.

That dialogue will continue in Seoul when Lee and Obama hold bilateral talks, and voices within the Obama administration like U.S. Trade Representative Ron Kirk are indicating that the President will press Congress on KORUS, despite his opposition in the Senate and as a candidate for the White House.

As you might imagine, the key sticking point on KORUS for Obama and many D.C. delegates of rust-belt constituencies is cars. They say American cars won’t get a fair shake in the Korean market, which produces Hyundai, Daewoo, and Kia for domestic and international sales.

With the iShares South Korea Index ETF, you can easily tap Korea’s industrial base — autos and otherwise — and gain a major edge on the U.S. share market.

South Korea Exchange-Traded Fund Holdings

From January 1 through November 9, 2009, the South Korea ETF (NYSE: EWY) outperformed the S&P 500 by 63% to 19%!

The Korean ETF has even beaten its Hong Kong equivalent (NYSE: EWH) by over 7% during the same period.

EWY is stacked with conglomerates like Hyundai, LG, and Samsung, so you have plays on everything from hybrid cars to cell phones. They come cheap in this ETF, too. . .

EWY trades at an average price-to-earnings ratio of 13, compared to over 15.4 for S&P 500 components. The price-to-sales picture is even starker, with S&P sales currently being valued at more than twice equivalent sales from Korean companies!

We know from South Korea’s superior growth in 2009 and stellar forecast for 2010 that most investors are miscalculating, and that you can profit from their folly. Domestic demand, strong exporters, and a high-tech entrepreneurial base are all driving Korean shares to huge returns.

South Korea’s new success story is just beginning, and now is the time to start building a position in EWY.  

My time spent in Seoul served me well. . . I know what not to eat and I know what good investments smell like, too. By traveling around the world, you can really get a sense of what makes foreign markets move and how you can profit — no matter where you are. I’d like you to come with me on the next trip I take by joining Green Chip International. Subscribers are now up 61% on closed positions and have more than doubled the U.S. rally with stocks we’re still holding! To learn more, click here


Sam Hopkins
Sam Hopkins