Key insights
- The iShares South Korea ETF (EWY) experienced volatility due to geopolitical tensions in Iran, highlighting South Korea's dependence on oil imports through the Strait of Hormuz. The OECD has cut South Korea's GDP growth outlook while raising inflation forecasts. This suggests potential economic headwinds for South Korea, making EWY a riskier investment due to its sensitivity to geopolitical events and economic slowdown.
It wasn't just U.S. equities that tumbled immediately following the start of the war in Iran. Scores of international stocks sold off as spooked global investors dialed back risk.
Perhaps to the surprise of some market participants in the U.S., one of the international markets that displayed the most vulnerability to the situation in Iran was South Korea. Before the start of the war, the iShares MSCI South Korea ETF (EWY +1.76%) managed to hit a 52-week high just north of $152. Following the start, the share price slid to around $116 on March 31.
Actually, that rapid tumble isn't surprising, because South Korea is a major energy importer, and 70% of its oil imports come through the Strait of Hormuz. Compounding those woes was deterioration in the South Korean won, thus making it more expensive to purchase a commodity essential to the country's tech-heavy economy, which includes some of the world's bellwether non-U.S. semiconductor stocks.
On "Ceasefire Day," April 8, the iShares MSCI South Korea ETF jumped 8%, but for those keeping score at home, the $18.59 billion fund is up about 25% from its March lows. So nearly as rapidly as the ETF entered a bear market, it's clawed back much of those losses and now resides just 3% below its 52-week high.
Those big moves confirm South Korea's intimate ties to developments in Iran. In less flowery terms, the Strait of Hormuz needs to open in earnest and stay that way because, by some estimates, South Korea doesn't even have a month's worth of oil to cover its needs. That issue may well be why the Organization for Economic Cooperation and Development (OECD) cut its GDP growth outlook on South Korea by 0.4% while boosting its inflation forecast to 2.7%.
Slack economic growth and rising inflation can lead to recessions, meaning South Korea and this ETF are far from out of the woods as it relates to geopolitical tensions.
The South Korea ETF, which turns 26 years old next month, tracks the MSCI Korea 25/50 Index and has 81 holdings. If an investor just leaves things as they are, it's easy to assume this fund is somewhat diverse. It's not.
Samsung Electronics and SK Hynix account for 44.5% of this ETF's weight, making the fund potentially appealing to investors seeking access to one of the artificial intelligence (AI) "bottlenecks": dynamic random access memory (DRAM).
Ties to the DRAM theme are benefiting investors as highlighted by this ETF's 51.8% year-to-date gain. Still, semiconductor production is notoriously energy-intensive, underscoring this fund's vulnerabilities to the war in Iran.