South Korean ETF Weekly Outflow Reaches Most On Record Amid Tensions With North, EM Rout

Photo courtesy of Flickr – Republic of Korea

The largest exchange traded fund (ETF) that tracks South Korean equities, The iShares MSCI South Korea Capped ETF, just saw the largest weekly outflow since its inception back in 2000 as a rout in emerging markets deepens, oil prices continue to fall, concerns about the U.S. Fed hiking interest rates, and as tensions grow in the Korean peninsula between North and South Korea.

In the five days ending on August 21 investors pulled $195.4 million from the ETF, the largest weekly outflow on record, according to Bloomberg.

The ETF, which has $3.1 billion in assets, tumbled 7.2 percent to nearly a four-year low during the week and has plunged 27 percent from a high in April.

According to Bloomberg, bearish bets against the South Korean ETF have tripled over the past month.

Investors have exited South Korean equities as they lose confidence that the nation will be able to defuse tensions with its neighbor and withstand a slowdown in China, its biggest trading partner.

Tensions between North and South Korea have now heated up and become quite serious after an exchange of fire across the border last week.  This was followed by North Korean leader Kim Jong-Un ordering his troops to be on a ‘war footing’ and threatened “indiscriminate strikes” on the South.

Amid tensions with the North and headwinds due to an economic slowdown in China, the South Korean government has vowed to stabilize its financial markets — even after it cut interest rates 4 times in the past year to a record low of 1.5 percent and unveiling the governments largest-ever budget — however there is only so much that its Central Bank can do to prevent a further investor exodus as a rout in emerging markets deepens.

The initial selloff in emerging markets started back in late April, but has picked up speed following China’s initial move to devalue its currency, which has sent global stocks, currencies, and commodities tumbling and pushed emerging market stocks into a bear market.

According to Bloomberg, over $3.3 trillion has been wiped out from global equities following China’s move.

As China continued to devalue its currency for three straight days, fears grew that other regional Central Banks would follow suit with their own currency devaluations, as such countries are attempting to maintain their own competitiveness against China.

This was confirmed as Vietnam became the first to follow in China’s footsteps, taking action last week and again on Wednesday as it decided to devalue its currency for the third time this year and also widened its trading band.

This was then followed by Kazakhstan’s decision on Thursday to scrap efforts to prop up its currency and shift to a free float and pursue inflation-targeting monetary policy.

Following the move, Kazakhstan’s currency plunged by 23 percent to an all-time low, in addition to rattling an already fragile market and sparking a sharp global equity selloff.

Emerging market currencies have been hit hard following these devaluation events and continue to remain under tremendous pressure as other Central Banks could be forced to also devalue their currencies amid plummeting oil prices and trade exposure to China.