(Bloomberg) -- Cracks are emerging in South Korea’s stock market, which has been showing remarkable resilience to a range of pressures, not least tension with the North.
Global investors have pulled $2.17 billion from equity exchange-traded funds focused on South Korea this year, even as those securities have returned 12 percent on average, according to data compiled by Bloomberg.
About half the outflows are from the Samsung Kodex 200 Securities ETF, which aims to closely track the Kospi 200 Index. Net outflows from the fund total $1.15 billion in 2017 even though it’s posted a 16 percent gain. That’s the most outflows for any Asia Pacific ETF this year and more than double the next closest fund, the data show.
“It might be some people giving some concern about the North Korea situation, obviously that would be something weighing on that irrespective of the performance being as solid as it’s been,” Shaw and Partners Ltd. senior wealth manager James Audiss said, referring to the Samsung Kodex ETF.
“It’s only really gone into the green over the last six months so there may be some profit-taking given that run-up,” Audiss said in a phone interview from Sydney. “In the preceding 18 months it was basically in the red.”
What about Kospi and won strength?
The outflows come despite the benchmark Kospi Index being at a record high and the won rising more than any other major Asian currency against the U.S. dollar this year, shrugging off North Korean missile launches, including a test Sunday, and U.S. President Donald Trump’s unpredictable foreign policy in the region. South Korea’s military fired warning shots across the military demarcation line at an unidentified object flying on Tuesday afternoon.
The Kospi Index added 0.2 percent as of 12:08 p.m. in Seoul on Wednesday, a fourth day of gains, on course for a fresh record closing high.
Goldman Sachs Group Inc. analysts said in a report last week it was “surprising” how much Korean assets have rallied this year. They suggested investors have grown used to tensions with North Korea and expect crises to blow over and markets to rally, and that people think the best trade is to buy on the dip.
Samsung Electronics Co. also plays a big part. The conglomerate is by far the largest stock in the Kospi Index with a weighting of more than 20 percent and it has jumped 25 percent this year, all while fending off activist investor Elliott Management and the trial of Vice Chairman Jay Y. Lee on embezzlement and bribery charges.
“You look at the weighting Samsung Electronics has in this index, the upside consensus is still really high and that’s a big weighting in it,” Audiss said. “Unless people are prepared to forego further upside, I wouldn’t be out of it. I’m still long Samsung.”
But skeptics on the market’s run are having their say. Bearish wagers on the iShares MSCI South Korea Capped ETF have more than doubled since the start of this year. Short interest as a percentage of shares outstanding topped 8 percent in May, the highest since January 2016, according to Markit data.
“You can find all kinds of things to talk about -- North Korea, Thaad missiles, President Moon being not as pro-business as Park was, those could be all the local components,” said Mark Matthews, head of Asia research with Bank Julius Baer.