AdvisorShares KIM Korea Equity ETF

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June 2018 Portfolio Manager Review

The Markets

In June, global stock markets performed poorly as concerns about a trade dispute between the US and China flared up again. After the US said it will impose a 25% tariff on up to 50 billion (bn) US dollars (USD) of Chinese imports, China fired back with a set of levies similar in scale. And with US President Donald Trump threatening China with an additional 10% tariff if the country proceeds to retaliate, fears escalated about a US-China trade war.

Unlike the June Federal Open Market Committee (FOMC) meeting that was more hawkish than the market anticipated, the European Central Bank (ECB) meeting outcome was viewed as accommodative, causing the euro (EUR) to plunge against the USD. And with the USD’s value rising on more investors seeking safe-haven assets, emerging countries suffered from faster capital outflows, leading to sluggish stock market performances. In particular, concerns that exports will be dented by the ongoing US-China trade dispute caused a significant slump across Korea, China and other emerging markets in Asia.

The domestic financial market was also on a wild ride. The (South Korean won) KRW/USD jumped from (won) W1,070 at early-June to W1,124. Such USD appreciation was triggered as 1) KRW upside momentum has dissipated since the US-North Korea summit, 2) preference picked up toward a safe-haven currency and 3) concerns mounted about slower domestic economic momentum due to dismal jobs market data and tepid exports growth.

The domestic market plummeted due to both external and internal noise. External factors include soured investor sentiment amid the reignited US-China trade spat and foreign capital outflow due to USD appreciation while internally, investors were on a selling spree to take profits from the potential beneficiaries of inter-Korean economic cooperation following the US-North Korea summit and domestic corporate earnings, including Samsung Electronics, were revised down in second quarter 2018 (2Q18).

In June, the Kospi retreated 4% and the Kosdaq fell 7%. By sector, the biggest gainers were telecom services (+6.2%), food & beverages (+4.3%), banks (+2.7%), textiles and apparel (+1.8%) and pharmaceuticals (+0.3%). In contrast, the biggest decliners were construction (-17.3%), non-ferrous metals (-16.9%), machinery (-10.9%), paper & wood (-10.3%), securities (-9.1%), transport & storage (-8.3%), electric & electronics (-7.2%) and transport equipment (-7.1%).

For the stock market to turn upward, the USD must lose ground and foreign buying resume. The key lies in the US-China trade war. The USD has been on a sharp rise but the upward pressure on the USD will likely ease if the trade row tones down. Risks related to monetary policies are mostly known to the public since the FOMC and ECB meetings in June while the economic and inflation gap between the US and the euro zone has stopped widening, which would help ease USD appreciation against the EUR.

The critical factor remains whether US-China trade hostilities will escalate. Even if the first battle in a trade war begins on July 6 with the US and China imposing tariffs on one another for USD 34 billion (bn) worth of goods, the two countries would likely negotiate a deal to adjust the level of tariffs, in our view. The reason is an outright trade war would cause more bad than good for both. This is especially so for President Trump with the November mid-term elections ahead as the US unilaterally igniting a trade war could possibly fuel inflation and trigger opposition from US businesses.

If the extreme scenario for US-China trade tensions does not unfold, the Kospi is at a level that offers downside protection not only in terms of valuation but also as market sentiment has tilted toward “panic selling”. As the Kospi’s 12-month trailing 1x PB equals 2,300pt, the index currently sits in deep value territory.

Given that the index is unlikely to retreat further, stocks that tumbled too much are always those that deliver the best returns in times of post-dip rebounds. Among sectors that pulled back excessively relative to the market, those likely to deliver better 2Q18 earnings are construction, machinery, securities, insurance and retail.

The Portfolio

In June, Kospi finished down 4% month over month (MoM). The potential beneficiaries of inter-Korean economic cooperation that rallied in May retreated due to the lack of momentum after the US-North Korea summit. Other risks were also highlighted such as more widespread trade protectionism pursuant to the US-China dispute and capital flight from emerging economies due to rising US Treasury yields.

Our portfolio underperformed the benchmark in June. Large-cap exports such as semiconductors, autos, chemicals and steel – overweighted in our portfolio – plunged due to souring sentiment amid intensifying US-China trade tensions. Conglomerate-affiliated service providers also pulled back due to tighter government regulations on biased intra-group transactions and dampened the portfolio’s performance. We reduced the weighting of stocks affected by mounting government regulation concerns. In the meantime, we further increased the weighting of large-cap exporters that recently plunged as we believe earnings visibility remains clear despite the trade conflict. We also scaled up the weighting of internet service and content providers that continue to offer brighter growth prospects backed by expanding platforms.

The Plan

The string of major events in June such as the US-North Korea summit, the US FOMC meeting, Korea’s regional elections and the OPEC ordinary meeting all ended in favor of the stock market but worries about a US-China trade war have temporarily dragged the global stock market into a pullback phase. However, uncertainties clamping down on a rally should fade after July 6, the date of the first wave of US tariffs. As the trade dispute issue is unlikely to spread to become a systemic risk, we believe the stock market could make a sharp rally before year-end. The Kospi’s current valuation at 0.93x 12 million forward price to book (PB) and 8.6x 12 million forward price to earnings (PE) is very attractive even given slowing earnings growth.

We will take advantage of the recent pullback to increase the portfolio weighting of large-cap exporters with good earnings visibility. With FX rates rising sharply of late, there is better visibility for large-cap exporters that suffered downward earnings revisions throughout the first half of 2018. These exporters now trade at very attractive valuations as shares plunged amid weak investor sentiment.

We will keep increasing the portfolio weighting of the sectors and stocks with standout growth potential. We shall maintain a large portfolio weighting of sectors related to China’s consumer spending that began to recover and the memory sector that constitutes the main pillar of the “industry 4.0” value chain. We will continue to explore retailers, payment solution providers and internet service companies with changing business models and lift their portfolio weightings. Whenever the stocks correct, we will add more biosimilar plays whose pre-emptive investments have erected high barriers to entry and pharmaceutical companies that have built a superior pipeline after lengthy investment efforts.

In the second half of 2018 (2H18), the minimum wage hike and fewer working hours would temporarily weigh on job market conditions while higher interest rates will raise household interest expenses. As the domestic economy is forecast to slow in 2H18, we shall reduce the weighting of stocks that derive revenue predominantly from domestic customers.



Korea Investment Management Co., Ltd.
Portfolio Manager of KOR

May 2018 Commentary


Top 10 Holdings

No. NAME Weight
2 SK HYNIX INC 4.96%
3 NAVER CORP 3.89%
6 CJ E&M CORP 2.76%
9 POSCO 2.40%


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There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. As a result of the Fund’s investments in securities receiving revenues in foreign currencies, the Fund will be subject to currency risk. This is the risk that currencies to which the Fund is exposed will decline relative to the U.S. dollar. Emerging markets can be subject to greater social, economic, regulatory, and political uncertainties and can be extremely volatile. To the extent that the Fund has significant investments in a particular country, the Fund will be susceptible to loss due to adverse market, political, regulatory, and geographic events affecting that country. Economic and political developments of South Korean neighbors may have an adverse effect on the South Korean Economy. Other Fund risks include market risk, equity risk, liquidity risk and trading risk. Please see prospectus for details regarding risk. Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. Holdings and allocations are subject to risks and to change.

The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.


The KOSPI Index or the Korea Composite Stock Price Index represents all common stocks traded on the Stock Market Division of the Korea Exchange weighted by market capitalization. The KOSDAQ Index measures the performance of Korea's KOSDAQ market, a stock exchange that is weighted by market capitalization. The price to book ratio indicates how much an investor is paying for a company’s assets based on historical valuations. It does not reflect current market value. The price to earnings ratio indicates the current share price of a stock divided by its earnings per share.