- Because of its deeply-ingrained sobriety on the POLICY front, we would typically be inclined to be long of South Korean equities and/or the Korean won (KRW) with respect to the long-term TAIL. From an intermediate-term TREND perspective, however, recent GROWTH and PRICE data suggests continued weakness in the South Korean economy.
- That portends negatively for global GROWTH, given South Korea’s consensus role as a leading indicator for the global economy.
Many analysts across the buyside and sellside use South Korea as a leading indicator for the global economy. We think this is largely due to the South Korean economy’s exposure to the global capital equipment cycle (using the KOSPI as a proxy). Tech and Industrials comprise 40.4% of the KOSPI; that’s more than every other benchmark equity index in Asia except Taiwan (49.6%):
As a leading indicator, the KOSPI’s Bearish Formation does not bode well for the intermediate-term outlook for global economic growth:
Neither does South Korea’s sovereign yield curve, which has continued to make lower-highs since late MAR:
Neither does South Korea’s NOV Business Condition survey data:
On the flip side, South Korea’s OCT Exports (+1.2% YoY from -2% in SEP) came in solid, on the margin, and rhymes with the recent pickup in Asian trade activity. We will note that the OCT Export data saw shipments to the US drop -3.5% YoY vs. a +21.1% YoY gain for exports to SE Asia.:
Somewhere in between the OCT Export data and the rest of South Korea’s GROWTH data lies the country’s OCT HSBC Manufacturing PMI, which accelerated to 47.4 from 45.7 in SEP. On balance, South Korea’s latest forward-looking GROWTH indicators look dour and portends negatively for global growth with respect to the intermediate term.
Looking to South Korean POLICY, which may help contextualize recent developments across other countries’ POLICY outlooks, we don’t expect any further rate cuts over the intermediate term and, absent a deflationary shock to the global economy, we think their next move on the rates front is likely higher, not lower. Trends in the South Korean sovereign debt and OIS markets agree with this view: 2yr yields slightly above the 2.75% policy rate and NTM swaps are pricing a mere 1bps under the policy rate (suggesting the market sees no change). The Bank of Korea will provide its latest update on NOV 8; consensus see no change then as well.
In conjunction with our aforementioned thoughts on South Korean monetary POLICY, we think the data supports being long/overweight the KRW vs. peer currencies with respect to the TREND duration as fiscal POLICY continues to exhibit increasingly hard-to-find sobriety across developed nations:
- “South Korea’s government plans to cut its fiscal deficit next year to the smallest in six years as policy makers preserve firepower amid a slowing global economy and rising welfare costs… Total spending will increase 5.3 percent to 342.5 trillion won ($306 billion), the Ministry of Strategy and Finance said in its budget proposal for 2013 released today. The deficit will shrink to 4.8 trillion won, or 0.3 percent of gross domestic product in 2013, down from 14.3 trillion won, or 1.1 percent this year, according to its calculations.” (Bloomberg)
- “Using all available fiscal, monetary and financial policy means could have harmful effects.” – Finance Minster Bahk Jae Wan on explaining why the government has resisted a supplementary budget
- While we like the fact that they are at least rhetorically committed to fiscal discipline, we’re not sure how or why they think a +5.3% YoY increase in planned expenditures (including increases of +4.8% and +7.9% in welfare and education, respectively) will be met with enough revenue growth to actually shrink the budget deficit! Their plan to capture ~11% of revenues from state asset sales looks aggressive given where global “risk asset” prices may trend into and through 1H13; that suggests they may be unlikely to meet their target. Still, we love the fact that Korea is stiff-arming the Keynesian Bailout Beggar crowd by preserving its stimulus bullets for when it actually needs them – ahead of a presidential election, might we add! From a lower PRICE, we like Korean equities from a long-term TAIL perspective amid continued fiscal and monetary POLICY sobriety – the confluence of which is increasingly harder to find across the Global Macro universe.
The largest fiscal POLICY catalyst within the intermediate-term TREND duration is the DEC 19 presidential election. The latest on that front is that liberal candidates Moon Jae-in and Anh Cheol-soo are in talks to merge their candidacies to provide a formidable challenge to the ruling Saenuri Party's Park Geun-hye. If that were to happen, there is a legitimate chance you could see a South Korean economic and fiscal POLICY swing left, on the margin – especially on the social welfare front (good for the consumer; bad for the sovereign budget). Chaebol reform is a possibility, but any action on that front is a ways away and may just be populist politicking on the campaign trail. For now, it is safe to assume Park wins and the conservative Saenuri Party remains in power.
From a cumulative GIP perspective, we think the KRW (+2% vs. the USD over the last month; best performer in Asia by far) is front-running a move to Quadrant #2 over the intermediate term; we’d expect to see the KOSPI follow suit as we get closer to that catalyst. For now, however, we remain in “do-nothing” mode on South Korean equities as a trip to Quadrant #3 is the most probable scenario for the fourth quarter. If there weren’t better opportunities on the short side of international equities, the KOSPI would be fully entrenched within our short inventory for the time being.
All told, because of its deeply-ingrained sobriety on the POLICY front, we would typically be inclined to be long of South Korean equities and/or the Korean won (KRW) with respect to the long-term TAIL. From an intermediate-term TREND perspective, however, recent GROWTH and PRICE data suggests continued weakness in the South Korean economy; that portends negatively for global GROWTH, given South Korea’s consensus role as a leading indicator for the global economy.