The biggest news making the rounds on a sleepy Monday in late December? North Korea has been threatening the U.S. over the Franco-Rogen flick, “The Interview.” I doubt that I would have spent any time in the movie theater to watch the satire, even if Sony had not pulled the film from its scheduled Christmas day release. The commercials failed to make me laugh. Nevertheless, this is one of those rare moments when terrorist threats – credible or not – have made most Americans feel like they've been beat.
In complete contrast, few things have beaten the U.S. stock market in 2014. Certainly not investing in corporations that do business in North Korea. Even market-based securities related to the neighboring south – where economic prowess and modern-day capitalism thrive – have been poor investments over the last four years. Investing in the S&P 500 SPDR Trust (SPY) has offered roughly 65% in the period, whereas iShares South Korea (EWY) has been a disappointing flop.
Admittedly, I have precious little exposure to overseas markets going into 2015. Other than a modest amount in WisdomTree India (EPI), most international assets in my client accounts had hit stop-limit loss orders in July. So why am I taking a look at a country that has struggled alongside developed Europe and Japan as well as emerging Asia? In essence, I believe the Bank of Korea will determine that the export-dependent nation must take steps to both stimulate its weak economy as well as depreciate its currency in the region.
If the Korean won loses value against the dollar, wouldn't that be bad for iShares South Korea (EWY)? Yes it would. On the other hand, additional stimulus from the Bank of Korea would benefit Korean corporations and a depreciating won would be effectively neutralized in a fund like WisdomTree Korea Hedged Equity (DXKW).
Korean companies in DXKW collectively have an attractive P/E of 12, an enviable P/S of 0.36 and a P/B of 1. If valuations ever start to matter again, who wouldn't want a piece of Samsung, Hyundai, Posco, LG and Kia? Employing DXKW gives one an opportunistic exposure to equities in South Korea, while simultaneously hedging against dollar-won fluctuations. And from my vantage point, the won is almost certain to take it on the chin in the year ahead.
