This week, the Korean central bank decided to keep their benchmark rate steady after mild concerns over future inflation and lowered growth forecasts. This begs the question: How should investors interpret South Korea’s prospects going forward?
A recent report by the energy research arm of business consultants Frost and Sullivan says power plant services are a steadily growing market, and the fastest growing regions of China, India and South East Asia will account for almost quarter of the market by 2017.
Asia has been waiting for Seoul to raise interest rates and support the won. This is part of the ripple effect from the yuan revaluation and is giving Korean banks a lift.
The Bank of Korea raised the local benchmark 7-day repo rate 25 basis points to 2.25%, catching most economists by surprise. The move was aimed at keeping inflation under 3% as the Korean economy starts firing on all cylinders.
Now that economists know the Seoul is opting to fight inflation instead of stimulating growth, at least one more rate hike is expected over the next few months.
The won rose 1% on the news. Higher interest rates support stronger currencies, while curbing inflationary pressures.
If China is letting the yuan float upward against other currencies, then Korea can afford to guide its own currency a little higher and still allow local industry to remain competitive against Chinese producers.
How to trade it
Markets are working now to price in the prospect of more rate hikes ahead, which will ultimately support the won and confirm the strength of the Korean economy.
There is as yet no won ETF. You can get some won exposure through the broad emerging markets currency ETF CEW, but it is far from a pure play on Korea or its monetary policy.
The export story is a continued plus for the broad Korean stock ETF EWY, which leans heavily toward giant manufacturers like Samsung as well as providing exposure to the robust domestic economy. And you could always buy into individual ADRs like LPL directly.