The next core position trade for Signalee is the iShares South Korea ETF (EWY). It has about $4.2B of assets with an average trading spread of 0.01% and daily volume in excess of $200 million. So it’s easy to get into and out of. Furthermore, its price to earnings ratio is only 13x, it has a distribution yield just shy of 3 percent (so we get paid to wait for price to go up or down), and it primarily holds technology, financial, and consumer cyclical stocks.
The only downside is its 20 percent concentration in Samsung Electronics. Not a dealbreaker as Samsung is a global juggernaut with a diverse product set, but Signalee typically tries to avoid concentrated positions.
Core Position Trading
One of the main tenants of core position trading is to buy the dip (#BTFD). EWY, like the rest of the market, got caught up in the sharp selloff that occurred at the beginning of February. Since core position trading relies on volatility, this was a relief as markets that go straight up for long stretches of time are infuriating for us. As prices stabilized and returned to its prior uptrend, we’re starting a position under the assumption that it’ll continue to grind higher.
If we’re wrong and price drops down to $64, then depending on the economic backdrop and other fundamental trading factors, we’ll re-evaluate the core trading position and determine whether to add to EWY or sell it entirely. I realize this seems vague and unhelpful, but traders who rely purely on price stops for exits often miss out on profitable opportunities when they blindly sell.
Why is South Korea cheap?
The most obvious reason why South Korea is trading at a discounted valuation to peers is because of the constant threat of war from its neighbor to the north. Even ignoring the nuclear threat, a massed artillery barrage into the heart of Seoul is always a hair trigger away.
The less obvious reasons why South Korea trades at a discount is because of the conglomerate structure of many of its companies, the clubby nature of the families that own and run them, and all the corporate governance issues that go along with a clubby structure.
However, the reason this will likely be a good core position trade for Signalee is that South Korea is a profit-seeking culture with an Ease of Business rank of #4. Its business landscape is diversified and doesn’t rely on natural resource extraction. Lastly, the threat of war is overblown. The North Korean regime wants to survive and stay in power. If it attacks South Korea in such a way that threatens its total destruction then the US would be forced to respond in a way that eliminates the North Korean regime.
In the meantime, the threat of war creates volatility and depressed valuations, which is where we come in to grind out some profits.