The greatest value of a picture is when it forces us to notice what we never expected to see. – John Tukey, “Exploratory Data Analysis"
The greatest value of a picture is when it forces us to notice what we never expected to see.
The MSCI Emerging Markets (EM) Index returned about 27% over the past year, compared with 18% for the MSCI All Country World Index (ACWI). The gap suggests broad EM outperformance. However, excluding South Korea changes the result: The MSCI EM ex South Korea returned 17%, almost exactly in line with the global benchmark.
The difference is large enough to alter how investors interpret EM performance. South Korea contributed 11.6 percentage points, or roughly 43%, of the MSCI EM’s total gain. The ex South Korea index returned 17%, one percentage point below the MSCI ACWI, erasing the benchmark’s 9-point advantage. Outside South Korea, EM equities performed in line with global equities; South Korea was the outlier.
Blog 135, “The World’s Best Market Is a Two-Stock Trade,” showed how South Korea’s rally was driven largely by Samsung and SK hynix, which came to represent more than half of the South Korean equity index, KOSPI, as demand for AI memory lifted earnings expectations and share prices. That concentrated advance also lifted the MSCI EM’s return.
The MSCI Korea Index rose 108.9% over the past year, while South Korea’s weight in the MSCI EM climbed to 18.7% from 10.8% and briefly reached 24.9% in late June. The higher weight amplified South Korea’s contribution and left the country responsible for the index’s entire advantage over the MSCI ACWI.
South Korea’s classification within the MSCI EM also impacts the result. Its economy and leading companies have many developed-market characteristics. Limits on offshore won trading, thin overnight foreign-exchange liquidity and other access constraints have kept it classified as emerging. Because South Korea remains classified as such, its AI-memory boom appeared in the headline return for emerging markets.
South Korea also influences the valuation investors see for the broader index. MSCI EM still trades at a relatively low forward price-to-earnings ratio after its advance because expected earnings have risen sharply. The earnings boom at Samsung and SK hynix accounted for much of South Korea’s contribution to that growth. The index’s low multiple significantly reflects a sharp increase in expected profits in South Korea alone.
A similar effect of the AI boom is visible in the United States. Goldman Sachs expects AI-infrastructure companies to generate nearly 60% of S&P 500 Index earnings growth in the second quarter, with Micron and Nvidia alone accounting for more than 40%. South Korea is a more extreme example because gains in two companies reshaped both its equity market and the broader MSCI EM.
Just one country’s AI-memory boom has been responsible for the MSCI EM’s entire advantage over the MSCI ACWI over the last 12 months. South Korea supplied roughly 43% of the index’s gain, with much of the country’s advance tied to Samsung Electronics and SK hynix. The headline numbers suggest broad EM outperformance, but the excess return came from a concentrated rally in South Korea.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
