International Focus: Looking at Last Month in the Korean Equity Market
By Korea Investment Management, portfolio manager of the AdvisorShares KIM Korea Equity ETF (Ticker: KOR)
Global stock markets finished up in April, but performances were mixed by region. Developed markets were bullish, namely the eurozone states Italy, France, UK, Germany and Spain. Meanwhile, emerging economies such as Russia, Indonesia, China and Taiwan stock exchanges retreated on a bearish note.
Concerns about a US-China trade war, the spread of geopolitical risks involving the US, Syria and Russia, in addition to the pullbacks of Facebook, Amazon, Netflix and Google, dubbed the FANG stocks, appear to have sapped the appetite for risk assets. Sentiment to avoid risk assets dissipated after concerns about a US-China trade war eased somewhat following the Boao Forum, but the upside for stocks weakened as oil prices climbed on uncertainties in the Middle East and the US 10-year Treasury yield nearing 3%. An appreciating US dollar (USD) couple with the rising Treasury yield dampened the performance of emerging stock markets compared to developed economies.
In South Korea, the stock market was bolstered by milder geopolitical tensions with North Korea following the inter-Korean summit. Topping this off, also favorable for stocks, was the wind-down of downward revisions for domestic corporate earnings estimates given events such as the 1Q18 earnings surprise at Samsung Electronics that reported an operating profit (OP) of W (won) 15.6 trilion (tn).
In April, the Kospi gained 2.84% and the Kosdaq 0.56%. By sector, the biggest gainers were those anticipated to benefit from inter-Korean economic cooperation such as construction (+27.0%), non-metallic minerals (+23.2%), electric & gas utilities (+12.3%), iron & metal products (+9.4%) and banks (+9.2%). In contrast, sectors that lost steam were medical supplies (-5.5%) and services (-4.3%).
In May, we believe the domestic stock market should draw a moderate upward curve ahead of two major events that could serve as inflection points. 1) The outcome of the US-China trade war. 2) The results of the multilateral talks with the US-North Korea summit at the fore. With regard to the US-China trade war, we believe a drastic situation is unlikely to unfold given that US President Donald Trump needs to work in cooperation with China to put pressure on North Korea. In addition, we believe a wind-down of the “Korea discount” should materialize as confidence in establishing peace on the Korean peninsula grows with the US-North Korea talks, followed by concrete plans for inter-Korean economic cooperation.
The rising US Treasury yields and strong USD would create a burden in the near-term but we believe it would not overturn the uptrend for risk assets. Unlike February, the recent climb for bond yields were largely fueled by rising oil prices, and with the European Central Bank (ECB) and Bank of Japan (BoJ) reaffirming their commitment to an accommodative monetary policy, the US 10-year Treasury yield has also been capped from going much past 3%. The USD’s strength also comes from larger-than-expected speculative net positions in the course of paring losses after being weighed down by the euro’s (EUR) appreciation. As such, we believe the strong USD is unlikely to carry on for long.
A favorable operating climate should continue for the information technology (IT) sector as upward pressure on the USD should persist through May. But we must focus on a possible rebound for the cyclical sectors as the USD would turn downward after breaching an inflection point. Furthermore, we must pay constant attention to Chinese consumer spending-related stocks as 1) the US-China trade war would eventually lead to a weaker USD and stronger Chinese yuan renminbi (CNY) and 2) China’s propensity to consume has recently picked up.
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