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Korean stocks and The Won are trading up, we are not a buyer… waiting to re-enter the game on the short side, rather.

Bank of Korea announced the first increase in foreign currency reserves in 9 months today, spurring the Won higher against the dollar and Yen and lifting stocks higher. The won was the worst performing major Asian currency in 2008 and the KOSPI was a complete disaster at -40% for the year , but the glass half full crowd is now starting to buy again based on the thesis that the worst is over. We disagree.

The increase in currency reserves does not necessarily indicate as large a bullish turn as it might look at first blush. After the central bank spent 65 billion dollars trying to prop up the Won it appears to have finally found a bottom 25% lower than the dollar for the year and about 35-40% lower than both the Yen and Yuan. The good news is clearly that Korean exports will be more competitive in China, which now accounts for over 20% of total sales abroad. The bad news is that -even with resilient Chinese buyers for semiconductors and cell phones, the heavy concentration of Korean industry on large machinery; nautical and automotive manufacturing will probably mean that the real economy won’t bottom out until later in the year at best when the government’s $11 billion stimulus package focused on public works (hopefully) gets under way.

Additionally, despite the improvement in regulation and oversight since the financial crises a decade ago, the Korean banking sector is more levered than other Asian institutions and is still far from done working through the bad real estate debt that it gorged on over the past 5 years. Despite currency stability and lower nominal rates the credit market, Korea remains frozen, as evidenced by the Korean Development Bank’s recently announced Dollar and Yen denominated debt issuance –needed to shore up short term working capital.

We will keep our eye on Korea carefully and as always reserve to right to change our mind as soon as the data changes, but for the time being the bad there continues to outweigh the good.

Andrew Barber
Director