Equities: Three Reasons To Expect Further Outperformance
BMI View: South Korean equities have done well versus the region in recent weeks, and we see scope for further outperformance (particularly against South East Asia) in the short-to-medium term. Macroeconomic stability, exposure to cyclical upturns in the US and eurozone, and fairly attractive valuations should all act as tailwinds for the market. In absolute terms too, the benchmark KOSPI could embark on a renewed leg higher should it manage to successfully consolidate above resistance-turned-support at 2,000.
South Korean equities have performed well in recent weeks. Since the start of July, the benchmark KOPSI index has notched up gains of 7.8% versus losses of 1.8% for the MSCI South East Asia Index. Going forward, we identify three reasons why we believe that Korean stocks can continue to outperform in the short-to-medium term.
No Repeat of 1997: One of our core views in the recent EM shake-out has been that Asia does not face another '1997 moment', as structural fundamentals such as current account positions, reserve coverage, and short-term debt paint a much healthier picture this time around. This is a particularly pertinent point for South Korea. As we wrote in last week's currency forecast, 'The huge current account deficits that were once the underbelly of the Korean economy have now become a thing of the past. Additionally… the country saw its external short-term borrowings hit a six-year low in Q213, accounting for less than 30% of the country's total external debt pile.' The market appears to agree with our view that South Korea's external health remains in decent shape. The country's 5-Year sovereign credit default swap (CDS) has hardly budged in recent weeks, standing at 74 basis points (bps). This stands in stark comparison to Malaysia, another investment grade credit, which saw spreads more than double at their August peak from the start of the year.
|Korean Protection Has Hardly Moved|
|Asia - South Korea Versus Malaysia 5-Year CDS, bps|