South Korea Possesses Advantages Despite Volatile Economic Conditions, According To Market Experts

by Czarelli Tuason / Nov 03, 2015 10:21 PM EST

First trading day of 2015 at Korea Exchange Inc. (Photo by Bloomberg | Getty Images)

Despite being the fourth-largest economy in the world, South Korea as an emerging market is still a topic for debate among market experts especially that the country is not included in the stocks of the largest emerging markets exchange traded fund (ETF), the Vanguard FTSE Emerging Markets ETF, reported Benzinga Oct. 20.

Currently, South Korea is the second-largest country in the MSCI Emerging Markets Index at 15.6 percent, but the country has reportedly done better in previous years.

Fortunately, market experts still see some advantages of South Korea, including a low debt-to-GDP ratio, a highly developed economy and an accommodating central bank.

"As recently as mid-September, Standard & Poor's (S&P) upgraded Korea's credit rating to AA-, the highest level in nearly 18 years," said Wisdom Tree Korea Hedged Equity Fund in a research note. "It said Korea is likely to maintain economic growth higher than most developed economies over the next three to five years. S&P is further encouraged by the decline in external debt owed by Korean banks and reduced short-term borrowing in total external debt."

According to Korea Times on Oct. 5, the country's stock exchange operator is planning to attract overseas ETFs into the local bourse to keep up with the increasing demand for foreign direct investments by South Koreans.

The Korea Exchange (KRX) aims to lure foreign ETF giants, including iShares Silver Trust and SPDR Gold, and to include ETF tracking currencies such as the Japanese yen and Chinese yuan on the local stock market.

South Korea's ETF market has rapidly lured investors looking for safer investment vehicles since its launch in 2002, with assets shooting up from 300 billion won to 20.7 trillion won at the end of September.

KRX stated that it plans to triple the ETF market by the year 2020 at 60 trillion won in total assets, plus a two trillion won in daily turnover.

"While the EM region remains a tricky landscape to navigate, we believe it is important to be able to concentrate on areas in EM where both cyclical and structural factors align to support equities and currencies," pointed Wisdom Tree. "Korea makes for an interesting market that stands out for its performance in 2015, relative low cost to hedge against currency weakness and fairly wide spreads for earnings yields compared to bond yields."