January 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 market conditions sent the prices for risk assets surging in January. Emerging market performance was particularly strong amid the broad rally of the world’s major stock markets. The MSCI EM Index rose to a fresh high and the Kospi also joined the record-setting club by breaching 2,600pt during midday trade on January 30. The emerging countries’ currencies made big gains against the USD. Global oil prices also hit their highest since December 2014.
The global funds flow also implies a greater preference for risk assets. Net capital inflow to global equity-type funds has continued in large scale since the beginning of 2018. The amount of net inflow hit a weekly record-high of USD32.2bn (compared to the last peak of USD31.8bn in December 2014) in the last week of January.
The stronger risk appetite of global funds is mainly attributed to 1) a more upbeat outlook for the global economy, upward revision to the outlook for economic growth in both developed and emerging countries, 2) higher prices for commodities and mounting inflation expectations amid the economic expansion and 3) on top of that, a weak USD.
The Korean stock markets pulled back at end-2017 whereas other global bourses gained but in January, it renewed its all-time high. In particular, the Kosdaq skyrocketed supported by the government’s measures to boost the market for smaller stocks. In January, the Kospi rose 4% and the Kosdaq gained 14.4%.
On the Kospi by sector, big gainers were securities (+21%), pharmaceuticals (+14.6%), paper/wood (+12.3%) and non-metallic minerals (+12.7%). Among the decliners were electric & gas utilities (-2.4%) and electric & electronics (-1.6%). Specifically, the securities sector was buoyed by heavier trading volume amid the Kosdaq’s rally and pharmaceuticals rose as expectations for earnings remained intact through 2019. The electric & electronics sector was pulled down by mounting concerns about DRAM prices.
In February, we expect unchanged investment conditions with regard to 1) greater anticipation for the global economy and 2) upbeat inflation sentiment. However, we must closely monitor the trend of higher interest rates and bearish USD, which has been fueling the recent rally among risk assets. If the pace of interest rate increase picks up, this would not be favorable for the equity market. In the near-term, the bearish USD (and strong KRW) is unlikely to accelerate further. US stocks that have driven global equity markets are showing signs of short-term overheating while in the Korean market, the downward revisions to 2018 earnings estimates after ending the 4Q17 announcement season also erect a hurdle. Therefore, we believe the stock market’s upward resilience would significantly diminish compared to January.
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.