November 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 stock markets continued to rise in November, extending the winning streak to 13 months. While developed markets were robust, emerging markets posted only incremental gains. Backed by solid economic data, the US stock market advanced on Jerome Powell’s nomination to serve as the next Fed chairman and on hopes for the tax overhaul. In contrast, European markets ended down MoM in November due to mounting political uncertainties in Germany and Spain. Among emerging markets, Russia gained ground while China, Korea and Taiwan retreated.
In Korea, the Kospi shed 1.86% while the Kosdaq rallied 11.12%, widening the gap. With aggressive style rotations occurring in the US market and the IT sector pulling back sharply, Korea’s IT stocks fell even more rapidly. Due to increasing reports from mostly foreign investment banks over growing concerns that the semiconductor market had reached a cyclical peak, Samsung Electronics shed 7.8% and SK Hynix 6.6%; fueling the overall Kospi decline. Furthermore, the Kosdaq index continued to firm, and this further undermined Kospi supply-demand dynamics. In addition, efforts by the Korean government to bolster Kosdaq trading added to the demand for Kosdaq-lead IT and biotech stocks. In fact, foreign investors net bought W0.3tn and domestic institutions W10.9tn on the Kosdaq.
As for the Kospi, the biggest gainers were non-ferrous metal (+11.5%), textiles/apparel (+6.6%), medical precision (+5.6%) and securities (+2.7%), while electronics (-6.2%), construction (-5.0%), insurance (-3.5%), transportation/storage (-2.9%) and electricity/gas (-2.1%) were the biggest losers.
Meanwhile, the Bank of Korea lifted the benchmark rate by 25bp, the first hike in six years and five months. As such, the three-year government bond yield, which had already priced in a rate hike, slipped to 2.07% after the Monetary Policy Committee (MPC) meeting. The KRW/USD dropped W32.1 MoM to W1,088.2.
Considering the solid global economic conditions and brisk outlook for exports, we believe the Korean market will continue to trend up. However, both Korea and overseas markets may adjust given signs that global economic momentum is overheating, the US tax code revisions may be passed before yearend, the Fed may raise US rates at the December Federal Open Meeting Committee (FOMC) meeting and China may continue to tighten financial regulations. As such, the Kospi should trade sideways rather than climb higher through the yearend.
As the KRW/USD decline is expected to wind down and reverse, foreign demand in the domestic market should ease partially. Overall, we forecast more favorable conditions for small- and mid-cap stocks rather than large caps. With the investment bias towards the IT and biotech sectors fading, China consumer spending-related plays that would benefit from better Korea-China relations should catch up to the current market leaders.
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.