Weighed by the US’s continued monetary tightening and the unresolved global inventory glut, stock markets in EMs have failed to display a sustained rebound. At the same time, fears over potential EM currency crisis are mounting. Against this backdrop, we note that the global CLI has resumed picking up, whilst the US will likely take more time than expected to impose an additional tariff on US$200bn worth of imported Chinese goods. Drawing attention to the increasing likelihood that the Kospi will rebound from late 3Q18, we recommend taking full advantage of a trading-buy strategy.

With US inflation passing through a peak, concerns over the pace of the Fed’s tightening have weakened, helping to boost expectations that the current strong dollar trend will ease over time. Moreover, the Turkey lira crisis is unlikely to spread across EMs. On another positive note, the US will likely take more time than expected to impose an additional tariff on US$200bn worth of imported Chinese goods

Following the outflow of capital from passive funds in August-in the run-up to large-cap China-A shares’ inclusion in the MSCI Emerging Markets Index (on Sep 3)-the Kospi should be less weighed down by the impact of index rebalancing from September

We expect global real economic momentum to pick up in earnest from 4Q18, following the global composite leading indicator (CLI)’s rebound seen since April. While stock markets in EMs (including Korea) are highly likely to rebound from late 3Q18, the anticipated recovery will probably show a range bound pattern, instead of a sustained upturn

At the moment, fears towards EM currency crises are rapidly spreading. Countries witnessing an accelerated drop in their currency value are displaying relatively weaker share performances.

With the dollar sustaining its strength, concerns over a potential dollar crunch in EMs are mounting. In our view, such concerns have been excessively reflected in the Kospi’s recent performance, particularly when considering Korea’s: 1) current account; 2) foreign currency reserves; and 3) short-term foreign currency-denominated debts. We believe that Korea is far from being on the verge of a currency crisis

Amongst EMs, Korea boasts the highest current account-to-GDP ratio, following Taiwan and Thailand. In particular, we note that Korea is capable of accumulating dollars via global trade. Therefore, Korea should be excluded from a list of countries that have current account deficits and are likely to be hit hard by a strong dollar, such as Turkey, Argentina, Pakistan, Egypt, and South Africa. As short-term foreign liabilities exceed forex reserves in Turkey and South Africa, both countries could experience a dollar liquidity crunch, depending on forex market conditions. In contrast, Korea’s short-term foreign liabilities stand at US$120bn, while its forex reserves exceed US$400bn. Consequently, we believe that Korea is one of the countries that is least likely to experience a dollar liquidity crunch and a resultant foreign debt default

Admittedly, EMs’ long-term outlook remains uncertain, given that: 1) the Fed’s interest rate upcycle is in force; and 2) the global inventory glut remains unaddressed. In the past, stock markets have turned bearish due to the US Fed’s aggressive monetary tightening and resultant economic slumps. This time around, however, the Fed is data-dependent in setting the pace of its monetary tightening, and global economic momentum remains alive. The OECD + 6 EMs CLI has resumed uptrending since April. As the CLI is still low, there remains room for additional growth momentum. Accordingly, while chances are low that stock markets will turn bullish, we advise focusing on a possible rebound to take a trading-buy approach

EM index/S&P500 relative P/E (12M forward basis) stands at 0.67x, the lowest level since the global financial crisis. With the global CLI picking up, the relative P/E ratio is likely to extend its post-2014 trend. We foresee that stock markets in EMs will bounce back when investors’ risk aversion subsides. Given that the Fed’s FF rate upcycle is expected to last for some time, we recommend monitoring for rebounds in stock markets in EMs that might come when US-China trade tensions come to a lull

Trump’s recent two rounds of tariffs took effect about a month after their scheduled implementation dates. In detail, tariffs on steel and aluminum imports came into effect in June, and tariffs on US$50bn worth of Chinese goods were implemented in August. While a third round of tariffs is due to come into effect at end-September, it is unlikely to be implemented as scheduled, considering corporate hearings and corporate requests for grace periods.

The dollar has appreciated on the strong US economy, the Fed’s FF rate upcycle, US trade protectionism, and EM crises. Once US inflation peaks out, EM crises subside, and US-China trade tensions come to a lull, the dollar is expected to weaken. The eurozone’s possible economic recovery from end-3Q18 should also lead to dollar depreciation. If the dollar weakens, global momentum funds will likely flow into the domestic equity market

With the Kospi currently trading at a 12M FWD P/B of 0.9x, we suggest loading up on oversold stocks that are ready to rebound. An event-driven market has persisted throughout 2018, with certain individual plays leading the market-a phenomenon attributable to foreigners’ net selling spree on weakened risk appetite

Korean semiconductor and pharmaceutical/bio stocks have outperformed global stocks, offering differentiated merit. Having fallen excessively over July~August, such stocks are poised to rebound in September.

【The contributions from outside analysts are unrelated to the views of the publisher. They have been contributed in English and the wordings have been mildly edited.】



By. NH I&S Strategy Department Analyst Julie Cho

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