SHORT THE KOREAN WON?

Takeaway: We think the BoK is gearing up to ease monetary policy and/or intervene in the FX market to arrest KRW appreciation.

CONCLUSIONS:

 

  1. Our GIP model sees the South Korean economy in Quad #3 (i.e. Growth Slowing as Inflation Accelerates) over the next few quarters, a catalyst that should weigh on inflows into the nation’s capital markets.
  2. Moreover, we see both growth and inflation undershooting official and consensus targets over the intermediate term. Slowing growth in the US, Japan and “Old China” should cap exports gains (i.e. the primary driver of Korea’s 1Q14 GDP growth acceleration) going forward and annualized FX strength – particularly in 2Q and 3Q – should limit the impact of global cost-push inflation from the commodities markets.  
  3. To the extent our models are proven correct, we would anticipate a dovish/interventionist policy response out of the BoK in the currency market at some point over the intermediate term. That would be an easy “sell”, given the KRW’s material outperformance on a 1D, 1W, 1M, 3M, 6M, 1Y, 18M and 3Y basis.
  4. Our FX valuation models see downside in the KRW vis-à-vis the USD on the order of 5-6% on a REER basis and 7-9% on a carry basis. Historical correlations suggest deltas of this magnitude in the currency market are likely to weigh on the Korean equity market as well as the country’s USD debt.
  5. That being said, however, we’re not raging bears on either asset class. South Korea has proven unsurprisingly resilient to changes in foreign portfolio flows into EM economies in recent years, which is very much in line with our proprietary EM crisis risk modeling work. Additionally, what the KOSPI lacks in dividend yield support, it makes up for in sheer [perceived] cheapness that may continue to perpetuate a fairly consensus intuitional bid into the nation’s stock market.

 

SHORT THE KOREAN WON? - SOUTH KOREA

 

SHORT THE KOREAN WON? - 2

 

SHORT THE KOREAN WON? - 3

 

SHORT THE KOREAN WON? - 4

 

SHORT THE KOREAN WON? - FX

 

SHORT THE KOREAN WON? - 8

 

SHORT THE KOREAN WON? - 9

 

SHORT THE KOREAN WON? - 5

Source: Bloomberg


SHORT THE KOREAN WON? - 10

 Source: Bloomberg

 

SHORT THE KOREAN WON? - 7

Source: IMF

 

SHORT THE KOREAN WON? - 12

 

SHORT THE KOREAN WON? - 13

 

SHORT THE KOREAN WON? - 14

 

Feel free to ping us with any follow-up questions. Have a great evening,

 

DD

 

Darius Dale

Associate: Macro Team


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more