Asian Shares Hit Decade High On Record Profits (Again)

 | Nov 01, 2017 | 11:00 AM EDT
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Record profits at Samsung Electronics (SSNLF) powered South Korean stocks to another record on Wednesday, while record earnings at Sony (SNE) catapulted Japan's Nikkei 225 index to a 21-year high. Investors could also take confidence in the re-election of Prime Minister Shinzo Abe in Japan by lawmakers on Wednesday, after his recent victory in snap elections. 

The performance in Seoul helped bring Asian stocks as a whole, as measured by the MSCI Asia ex-Japan Index, to a 10-year high. Investors can tap that index via the iShares MSCI All Country Asia ex-Japan ETF (AAXJ)

Korea's benchmark Kospi index climbed 1.3% for the day to its highest close ever, while the Nikkei jumped 1.9%. Asian stocks normally take their lead from U.S. performance, but in this case investors were buoyed by performance from Asia-based companies themselves.

Of course, the Nikkei 225 is a far cry off its all-time high set in the bubble years of the 1980s. At 22,420 now, it is still 43% below its record of almost 39,000 set in 1989, before the bubble burst.

Tokyo's broader Topix index, which reflects all the stocks trading on the main board in Tokyo, finished the day up 1.2%. Investors interested in Japanese equities can play the market with the iShares MSCI Japan ETF (EWJ) , the newly popular WisdomTree Japan Hedged Equity Fund (DXJ) or the Deutsche x-Trackers MSCI Japan Currency-Hedged Equity Fund (DBJP) .

Yesterday, I highlighted 10 companies making capital goods that should benefit from increased capex by Japanese companies. Executives in Japan are more positive about the shape of the economy than they have been in years. The Bank of Japan's tankan survey of corporate confidence is at a decade high. Gradual economic growth seems to have gained momentum, after numerous false starts. 

Samsung shares rose 3.9% in Korean trade on Wednesday and are up 58.8% this year. Together with Hynix (HXSCL) , the two companies account for the bulk of the Kospi's gains over the last year.

Sony shares ended up 11% for the day, a nine-year high for the electronics-and-entertainment giant, after the stellar earnings caused it to boost its full-year profit forecast by 26%.

Phone, semiconductor and appliance maker Samsung on Wednesday named three co-CEOs to head its three main businesses: memory chips, touchscreens and smartphones.

Other tech stocks gave the rally legs. Tokyo Electron (TOELY) , which makes equipment for making semiconductor chips and plasma screens, closed up 13.4% at a record high, after increasing its profit forecast for the 2017/18 fiscal year by 21.5%. 

It's easy to say we're in refined air that has to eventually leave us without any oxygen to breathe. But record profits justify record share prices. Other markets, such as Hong Kong's Hang Seng index, driven by financials and China plays, have also advanced. The Hang Seng index rose 1.2% on Wednesday, bringing it to 28,594 and 9.6% off its all-time high of 31,638 set in 2007.

Korean shares are trading at a price-to-earnings ratio of 12.1, with a dividend yield of 1.3%. It's interesting to watch if they go through a re-rating, since Seoul listings have suffered from the "Korea discount" imposed due to poor corporate governance. New President Moon Jae-in promises to tackle corruption among the chaebol conglomerates that run the country's economy, as well as collusion with the government that for years went unquestioned.

That does not appear to deter investors. Of course, the heir to the Samsung empire, vice chairman J.Y. Lee, is now in prison, appealing his five-year sentence stemming from a bribery scandal. Samsung Electronics head Kwon Oh-hyun resigned last month, saying the company faced an "unprecedented crisis."

The Kospi index has advanced 24.5% in 2017. U.S. investors can play it through the iShares MSCI South Korea Capped ETF (EWY) , up 40.5% this year, or the Deutsche x-trackers MSCI South Korea Hedged Equity Fund (DBKO) , which has mirrored the index's showing more precisely, up 29.7% year-to-date.

Of course, there's the Direxion Daily South Korea Bull 3x Shares ETF (KORU) , which is up 147.5% in 2017. But such leveraged ETFs, like their bear half-brothers that short a market, can produce performance that varies wildly away from what you'd expect. That's because they are often constructed with derivative positions that are expensive to maintain, and are typically rebalanced daily. They're better left as vehicles for day traders.

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