KOSPI LOSING LEADING INDICATOR STATUS?

Takeaway: Korea's KOSPI has been a good leading indicator of global growth, but the currency wars might be changing that.

This note was originally published March 25, 2013 at 15:25 in Macro

SUMMARY BULLETS:

  • The impact of the Currency War is perpetuating mixed signals out of the KOSPI, which many Macro analysts consider a leading indicator for the slope of global growth.
  • The fact that the KOSPI chart is not up-and-to-the-right as a pro-growth signal (itself perpetuated by declining prices for energy and raw materials inputs) doesn’t necessarily imply global growth is destabilizing.
  • Rather, it implies a loss of international market share among South Korean manufacturers and exporters to their Japanese counterparts amid the sustained trend of yen depreciation, which remains firmly intact.

Manufacturers of “capital goods” (using the Industrials and Tech sectors as proxies) account for 41.9% of the market capitalization of South Korea’s benchmark equity index (the KOSPI). That compares to 29.6% for Japan – South Korea’s chief regional competitor across a variety of key industries and export markets – which itself is also well above the regional average of 20.4%.

 

KOSPI LOSING LEADING INDICATOR STATUS? - KOSPI CapEx

 

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Over the weekend, South Korea’s newly appointed finance minister, Hyun Oh Seok, revived his nation’s concerns over JPY debauchery said that the G20 should revisit the issue. On just his second day as finance chief, Hyun firmly proclaimed, “The yen is depreciating while the won is gaining and this is flashing a red light for Korea’s exports… While we will do what we can, we need international cooperation to deal with the weak-yen problem.”

Hyun’s whining may fall on deaf ears, however, as Japan was able to escape any semblance of int’l censure of its Policies To Inflate at the last G20 summit. Because Japanese officials have been very careful in their rhetoric that their economic policy agenda is targeted at overcoming domestic headwinds and not for the sake of currency devaluation, G20 finance ministers are broadly on board with Abenomics – making it very hard for South Korea to find reprieve in the form of int’l censure(s).

Even if Japanese officials weren’t as adept at sidestepping int’l criticism, it’s unlikely the G20 has the political ethos to censure Japan anyway; the US, Eurozone and the UK have each taken multiple turns at being the world’s biggest money-printers and currency debauchers over the past ~5 years.

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Net-net, that should continue to perpetuate a loss of market share among many South Korean manufacturers that compete head-to-head on price with their Japanese counterparts. In effect, Hyundai’s loss is Toyota’s gain in a world where consumer demand for automobiles isn’t necessarily robust.

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KOSPI LOSING LEADING INDICATOR STATUS? - Korea KOSPI

All told, the impact of the Currency War is perpetuating mixed signals out of the KOSPI, which many Macro analysts consider a leading indicator for the slope of global growth. The fact that the KOSPI chart is not up-and-to-the-right as a pro-growth signal (itself perpetuated by declining prices for energy and raw materials inputs) doesn’t necessarily imply global growth is destabilizing. Rather, it implies a loss of int’l market share among South Korean manufacturers and exporters to their Japanese counterparts amid the sustained trend of yen depreciation, which remains firmly intact.

 KOSPI LOSING LEADING INDICATOR STATUS? - 5