Short interest in South Korea ETF declines by over 50%

Aug 13th, 2015 | By | Category: Equities

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The NYSE-listed iShares MSCI South Korea Capped ETF (EWY) has been in steep decline since 23 April 2015, with fund performance down more than 20%. A significant drop in short interest, however, suggests that investors and traders may now consider this bear market to be reaching its bottom, possibly providing a buying opportunity to more risk-tolerant investors. Whilst the aforementioned ETF is listed on the NYSE, the European investors can play the theme via locally listed ETFs from iShares and Deutsche Asset & Wealth Management.

Short interest in South Korean ETF falls by over 50%

A significant reduction in short interest in South Korea ETFs may signal a reversal of fortunes for the country’s suffering equity market.

The reduction in short interest has been significant. As of 15 July there were 2,179,916 shares of the ETF being sold short, a decrease of 57.5% from the 30 June total of 5,133,599.

South Korea posted lacklustre GDP results for the first two quarters of the year as the relative strength of the South Korean won against the Japanese yen and euro impacted heavily on the export sector. South Korean exports account for over half of GDP, leaving the economy vulnerable to external events.

Further to this, the slowdown in China has had a negative effect on steel exports from South Korea. Low oil prices also brought down the value of petro-chemical exports; however, it has been automobile sales that have been hit the hardest, as the middle class in China tighten their belts.

The economy has also been affected by a recent outbreak of Middle Eastern Respiratory Syndrome (MERS) in the country. There have been 36 reported deaths caused by the virus since the outbreak began in May and residents began limiting their movements to crowded places where the illness may more likely be transmitted. Consumption metrics have correspondingly declined. The tourism sector, an important boost to the economy, was down over 40% in June year-on-year as the outbreak of the virus deterred visitors.

Given these factors, the Bank of Korea revised their growth forecast for the year down to 2.8%, well below the more optimistic 3.8% that was predicted at the start of the year. The future may be looking brighter for the country though, explaining the drop in short interest on the South Korean equity ETF.

The government of South Korea has declared a ‘de facto end’ to MERS since 28 July and many countries have lifted their travel warning to the country. Although the World Health Organization (WHO) has not yet declared the outbreak over, this is something of a technicality. The institution requires 28 days (twice the length of the virus’s incubation period) to pass between the last recorded infection or death in the country. There is currently one individual under quarantine testing positive for the virus, yet there has not been a new infection or death recorded in weeks.

A stimulus package of 15tn won ($13bn) has been arranged to counteract the effects of the MERS virus on the economy. The money will be directed towards businesses which clearly suffered as a result of the outbreak such as consumer discretionary firms, as well as providing support for the fledgling export sector.

On Tuesday, China made a surprise move by devaluing their currency, the renminbi, by 1.9% in an effort to shore up their slowing economy. The South Korean won depreciated by 1.3% against the dollar almost immediately, highlighting the country’s interconnectedness with China. This will act as a slight buffer against a future fall in exports to China resulting from the relatively weaker renminbi, but also acts as an opportunity to boost exports to the US or Europe. Although the shift will not swiftly reverse the steady decline in exports, it may add sufficient support to halt the fall.

This may explain why investor sentiment is beginning to turn positive again (or at least, less negative) for the country, as evidenced by the drop in short interest.

The iShares MSCI South Korea Capped ETF (EWY), trades on the NYSE Arca in US dollars. The fund offers exposure to mid and large-cap firms in the Korean market by tracking the MSCI Korea 25/50 Index. The fund follows a full replication strategy and thus holds 109 securities, representing around 85% of the free-float market capitalization in Korea. Current sector exposure is tilted towards information technology (33.0%), followed by consumer discretionary (15.4%), financials (15.2%), industrials (13.9%) and consumer staples (9.3%). The top holdings of the fund currently include Samsung (19.4%), Hyundai (3.6%), SK Hynix (3.5%), Shinhan Financial (3.1%), KB Financial (2.4%). The total expense ratio is 0.62%.

The iShares MSCI Korea UCITS ETF (CSKR) trades in US dollars and sterling on the London Stock Exchange, and in euros on the Euronext Amsterdam, Deutsche Boerse and Borsa Italiana. In line with the NYSE fund, sector exposure currently leans towards information technology (35.1%), consumer discretionary (14.8%), financials (14.8%), industrials (11.7%) and consumer staples (8.9%). The top holdings are Samsung (21.3%), Hyundai (3.6%), SK Hynix (3.5%), Shinhan Financial (3.1%) and Samsung Preferred Stock (3.1%). The total expense ratio is 0.65%.

The db x-trackers MSCI Korea Index UCITS ETF (XKS2) trades in US dollars and sterling on the London Stock Exchange, and in euros on the Deutsche Boerse and Borsa Italiana. As per the iShares funds, it is currently exposed to the information technology (34.7%), consumer discretionary (15.0%), financials (14.7%), industrials (9.8%) and consumer staples (9.0%) sectors. The top holdings are Samsung (20.5%), Hyundai (3.6%), SK Hynix (3.5%), Samsung Preferred Stock (3.0%) and Shinhan Financial (2.9%). The total expense ratio is 0.65%.

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