February 2018 Korea Equity Market Review
By Seongin Jeong, Senior Market Manager at Korea Investment Management, portfolio manager of the AdvisorShares KIM Korea Equity ETF (Ticker: KOR)
Global financial markets went on a wild ride in February. Both developed and emerging stock markets fell more than 4%. The pullback was triggered in part by 1) further stoked inflationary expectations and 2) higher interest rates following uncertain monetary policies in the US. Inflation driven by January wages going up more than expected in the US and fears of an interest rate tantrum heightened the volatility in the global financial markets.
We believe the stock markets witnessed a sharper retreat due to a backlash from the overheated asset market rather than weaker fundamentals. That is, the pullback was aggravated by supply-demand disturbances as investors liquidated their excessive short volatility positions on exchange-traded products (ETP) that are linked to volatility indexes.
But share prices started picking up toward the end of the month. While portfolios that remained unchanged in the low volatility environment were temporarily being rebalanced, there was a considerable unwinding of short volatility positions. And with the financial markets reacting somewhat less sensitively to rising interest rates, the aversion to risk assets that appeared across the board gradually eased as well.
But as the stock markets rebounded, there was a clear divergence among countries. Specifically, commodity-rich countries that benefit from bullish commodity prices such as Russia and Brazil touched a new high for the year after erasing earlier losses. In contrast, export-driven countries such as China, Japan, Germany, Spain and Mexico were able to regain only a little.
In Korea, the Kospi gained for two straight weeks after plunging nearly 9% from the peak touched this year. But the rebound was weaker than the global stock market’s due to the slow earnings recovery among companies comprising the index. The Kospi-listed firms’ 2018 EPS estimate has been lowered 4% since the beginning of 2018. The Kospi and Kosdaq shed 5.42% and 6.19%, respectively, in February. By sector, the biggest gainers were medical precision (+7.0%), pharmaceuticals (+4.7%), paper & wood (+2.2%) and banks (+0.5%). The biggest losers were securities (-11.7%), construction (-10.5%), non-ferrous metals (-10.2%), telecom services (-9.1%) and textiles & apparel (-8.8%).
In March, the Korean stock market should resume the upswing, starting weaker but finishing on a high note. The stock market should remain volatile until the US Fed’s pace of interest rate hikes is confirmed by the Federal Open Meeting Committee’s meeting minutes in March. But thereafter, the Korea stock market should resume its upward path, buoyed by sound economic data and improving earnings.
Corporate Korea’s restored earnings reliability should become visible. Historically, the earnings estimates for the Kospi-listed firms were lowered during January-February and revised up in March when the first quarter results are outlined. The key point to watch is if larger firms can report an earnings uptick. When the downward earnings revisions wind down, we believe overseas investors should resume a net buy position mainly in the IT sector.
The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.