The KOSPI index broke through the 3,800 mark to set a new milestone, but the Morgan Stanley Capital International (MSCI) Korea Index-tracking exchange-traded fund (ETF) listed in the U.S. market has yet to surpass its all-time high, drawing attention. While component differences play a role, the primary reason cited is the weaker won.
On the 23rd, according to the financial investment industry, the "iShares MSCI South Korea (EWY)" ETF finished trading overnight on the New York Stock Exchange at $89.47. It rose 0.93% ($0.83) from the previous day. It briefly crossed the $90 mark during the session. Buoyed by the bull run in the domestic market, its year-to-date gain has reached 75%.
However, even though the KOSPI index set a new record with a previous close of 3,883.68, EWY still has not surpassed its all-time high. EWY's record high is $96.3, set intraday on Jan. 8, 2021. On the same day, the KOSPI index closed at 3,152.18.
There are differences in components. EWY tracks the MSCI Korea Index. The MSCI Korea Index is based on Korea-listed components within the MSCI Standard (large- and mid-cap) index. A total of 86 stocks, including Samsung Electronics and SK hynix, are included. It also holds KOSDAQ-listed names such as Alteogen, Ecopro, and ECOPRO BM, not just KOSPI market stocks.
The exchange rate is cited as the more decisive factor widening the gap between the KOSPI index and EWY. On Jan. 8, 2021, when EWY hit its record high, the won-dollar exchange rate versus the U.S. dollar was 1,087.7 won. It is now 1,430.1 won, up 31.5%. That means the won has depreciated by that much.
The picture becomes clear when converting the combined market capitalization of the KOSPI index into dollars. On Jan. 8, 2021, the combined market cap of the KOSPI index was 2.08295 quadrillion won, and on the previous day, when it hit a record high, it was 3.10494 quadrillion won. That is a 49.1% increase. However, when converted into dollars, the increase shrinks to 13.4%.
Several factors are cited for the elevated won-dollar exchange rate. Follow-up trade negotiations between Korea and the United States are still underway. Tug-of-war continues between the two countries over $350 billion in investment funds for the United States.
In addition, liquidity within the Korean economy is rising sharply. The growth rate of broad money (M2), which indicates market liquidity, stood at 8.5% as of August, the highest since June 2022. Simply put, a lot of money has been injected, which weighs on the value of the won.
Securities firms are raising their KOSPI index targets to around the 4,000 level, and they see further gains in the won-dollar exchange rate as limited. If the forecasts are correct, EWY could also renew its record high.
Still, there is no shortage of warnings. Ryu Jin-i, an analyst at KB Securities, said, "Looking at monthly data, the ratio of margin loan balances to individual transaction amounts rose from 12.4% in July this year to 17.4% by the end of August," and added, "If U.S. inflation concerns reignite next year, the pressure of rising global interest rates could expand volatility in the domestic stock market, and the side effects of leveraged investing could threaten financial market stability, which warrants caution."
Lee Ung-chan, an analyst at iM Securities, also said, "The side effects of policies supporting domestic assets have begun to appear little by little," and noted, "It is time to calculate additional catalysts for a further rise in next year's stock market."