As Korea Chipmakers Gain U.S. Verification, Investor Optimism Rises in iShares MSCI South Korea ETF

By Alex Sirois

• Semiconductor-heavy South Korean funds including iShares MSCI South Korea ETF (EWY) are looking brighter on eased export restrictions.

• The leading positions in EWY are the two firms most directly affected by the news.

• Exports of U.S. equipment to Korean chipmaking operations in China paves way for strengthening of strategic alliance.

The geopolitical dance that centers on a strained U.S.-China relationship has a focal point in the semiconductor industry. South Korea is a global leader in chip manufacturing and a close ally of the United States. The country’s innovation and technological leadership, paired with its geopolitical importance, add another dimension of intrigue to the nation which has recently emerged as a cultural force. 

The world is increasingly interested in Korea and all it offers. Korea’s prowess in chipmaking, especially memory, is well known. Firms like Samsung and SK Hynix feature heavily in exchange-traded funds that offer stable entry into Korea’s investment economy. Those Seoul-traded equities, and iShares MSCI South Korea ETF (EWY) in particular, are looking stronger. 

U.S. Green Lights Exports to S. Korean Chip Factories in China

Samsung and SK Hynix account for more than 22% and 6%, respectively, of EWY’s 107 holdings. It’s an accurate depiction of the Korean economy overall in which semiconductors lead overall exports accounting for nearly 19% of exports in 2022. 

Both firms had been facing serious uncertainty due to restrictions on U.S. chip making equipment from the U.S. Each was nearing the end of waivers granted to allow the import of equipment to respective manufacturing plants in China. 

However, the pressure has largely been relieved: Washington has verified Samsung and SK Hynix allowing the firms to acquire equipment for use in China on an indefinite basis moving forward. 

"Uncertainties about South Korean semiconductor firms' operations and investments in China have been greatly eased; they will be able to calmly seek long-term global management strategies," said Choi Sang-mok, South Korea’s senior presidential secretary for economic affairs, according to a Reuters report on Monday.

The shoring up of the regulatory environment for Samsung and SK Hynix should be a boon to both firm’s stocks and to the iShares South Korea ETF as well. The Seoul-traded shares of SK Hynix are up 3.1% in the last month, while its local peer Samsung’s shares are down 6.2% and the NYSEARCA-traded EWY shares are down 6.9%.

Importance of Samsung and SK Hynix Shouldn’t be Overlooked

Korea produces more than 60% of the world’s memory chips, with Samsung and SK Hynix leading production. In short, the country is a major link in the global semiconductor supply chain. 

Taiwan and South Korea produce most of the world’s semiconductors, but their ability to produce the chips is highly dependent on the supply of raw materials, equipment, and other inputs (such as chemicals and special gases), which come mostly from the U.S., Europe and Japan, according to a June 14 report by Rabobank analysts.

SK Hynix had telegraphed serious warnings about the continuity of its Chinese operations when U.S. restrictions ramped up last year. The firm noted the possibility that it may be forced to shutdown or sell its plant in the central Chinese city of Wuxi due to the restrictions. 

Source: RaboResearch

Uncertainty regarding the future direction of regulations as they pertained to each firm’s China-based operations loomed large, weighing down on Korea’s economy. 

This news should be considered a major victory overall and will serve to reassure semiconductor firms globally of Korea’s continued strength driven by its semiconductor industry. 

Victory Bolsters U.S. Domestic Production as Well

Samsung continues construction on its Taylor, Texas chip plant and campus. The reason I mention this is to highlight the further strengthening of the U.S.-Korea relationship in the chip industry. 

Taiwan and Korea are strong allies of the U.S. and that is especially evident in the chip sector. The recent verification of Samsung and SK Hynix allows U.S. exports of vital equipment for their China-based operations to resume. It is another positive step forward that strengthens vital relationships in an industry with important geopolitical and economic repercussions.  

Samsung and SK Hynix can breathe a sigh of relief as low-cost operations have been bolstered and that should lead to further good news from both firms moving forward. 

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. None of the above should be construed as investment or financial advice. Investing is inherently risky. Please perform your own due diligence.

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