South Korean Won

The South Korean Won (KRW) is the official currency of the Republic of Korea, more commonly known as South Korea. As the lifeblood of one of the world's most dynamic economies, the Won plays a significant role in global trade and finance. South Korea is an economic powerhouse, famous for its export-driven model and home to global giants like Samsung Electronics and Hyundai Motor Company. This means the Won's value is closely watched as a barometer for the health of global manufacturing, technology, and consumer demand. Unlike major currencies like the US Dollar or the Euro, the Won is not a primary reserve currency, but its importance in international trade makes it a key player, especially in Asia. For investors, understanding the Won is less about betting on its direction and more about grasping its profound impact on the performance of South Korea's world-class companies. It's a crucial piece of the puzzle when analyzing businesses operating in this vibrant market.

The fate of the Won is deeply intertwined with South Korea's economic performance. Because the country is a manufacturing and export juggernaut, a massive flow of foreign currency comes in when it sells its cars, semiconductors, and ships abroad, and a massive flow of Won goes out when it pays for imported raw materials and energy. This constant push and pull heavily influences the currency's value. The Bank of Korea (BOK), the nation's central bank, steers the ship. It manages monetary policy, sets interest rates, and occasionally intervenes in the currency market to smooth out extreme volatility. A key challenge for the BOK is balancing the needs of its exporters (who generally favor a weaker Won to make their goods cheaper internationally) with the need to control inflation (which a weak Won can worsen by making imports more expensive). This delicate balancing act makes the Won a fascinating currency to observe.

For a value investor, the most important question isn't “Where is the Won heading?” but rather “How does the Won's movement affect the businesses I own or want to own?”

Legendary investor Warren Buffett has famously said that currencies are not a productive asset. A US Dollar bill or a 10,000 Won note tucked under a mattress won't grow, multiply, or generate any earnings. It just sits there. “Investing” in a currency is essentially a bet that its value will rise relative to another—a zero-sum game that is pure speculation. A value investor, in contrast, buys a piece of a business. A great company creates value over time by inventing new products, improving efficiency, and growing its earnings. Your focus should be on the long-term earning power of the business, not the short-term gyrations of the currency it uses.

While you shouldn't speculate on the Won, you absolutely must understand it as a risk factor. Currency fluctuations can have a dramatic impact on a South Korean company's financial statements. Here’s a simple breakdown:

• A Weaker Won (Depreciation): This is generally a tailwind for South Korea's big exporters.
  1. Good for Revenue: Imagine Samsung sells a TV in the US for $1,000. If the exchange rate is 1,200 KRW/USD, Samsung books 1.2 million KRW. If the Won weakens to 1,300 KRW/USD, that same $1,000 sale now brings in 1.3 million KRW—an instant revenue boost without selling a single extra TV!
  2. Bad for Costs: On the flip side, the company has to pay more in Won for any imported parts or raw materials priced in US Dollars.
• A Stronger Won (Appreciation): This is often a headwind for exporters.
  1. Bad for Revenue: Using the same example, if the Won strengthens to 1,100 KRW/USD, that $1,000 TV sale now only brings in 1.1 million KRW, squeezing profit margins.
  2. Good for Costs: The company’s purchasing power increases. It costs fewer Won to buy imported materials, which can help offset the revenue hit.

So, how do you put this all together? When analyzing a South Korean company, don't try to predict the Won. Instead, ask these questions:

1. Where does the company earn its revenue? A company that sells mostly within South Korea will be far less affected by currency swings than a global exporter.
2. Where do its costs come from? Does it rely heavily on imported materials? This will determine its vulnerability to a weaker Won.
3. Does the company manage its risk? Look in the company’s annual report for discussions of its currency hedging strategy. Sophisticated companies don't leave their profits to the whims of the forex market; they use financial instruments to lock in exchange rates and protect their margins.

Ultimately, your goal as a value investor is to find a wonderful business at a fair price. The fluctuations of the South Korean Won are just one variable in that complex and rewarding equation. Understand it, respect its power, but keep your eyes firmly fixed on the prize: the long-term value of the underlying business.