South Korea is due a bounce

published 15 February 2019

934_MW_P05_Markets — Investors may soon have something to make a song and dance about

South Korea's exports are often seen as a bellwether for global demand. In the first 20 days of 2019, exports plummeted by 15% compared to the same period a year earlier. The fall occured on the back of a double-digit decline in the volume of goods shipped to China, Korea's main trading partner; America is the second-biggest.

This is the "latest sign that the slowing Chinese economy is hitting regional trade activity," says Edward White in the Financial Times. Exports in the electronics, car and ship sectors comprise around 45% of Asia's fourth-biggest economy's GDP. In 2018 Korea's GDP rose by 2.7%, a six-year low.

The country's exposure to the global economic cycle is even more marked in the stockmarket's benchmark index, the Kospi. Cyclical stocks comprise 80%of the index; electronics giant Samsung and car group Hyundai are key heavyweights. The regional and global slowdown helps explain why the Kospi slipped by 17% last year, its worst year since the financial crisis of 2008.

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Despite a bounce in the past few weeks, the immediate outlook is hardly encouraging. As ANZ analysts Krystal Tan and Irene Cheung point out in the FT, growth in China and the US is set to slow over the next few months. And the domestic economy seems unlikely to compensate for the external slowdown. South Korean consumers are up to their necks in debt. In the past decade, household debt has climbed from less than 75% of GDP to 95% of GDP, according to Deloitte.

This might offset the $21.5bn infrastructure boost announced by the South Korean government. Local analysts seem to think so: they have reduced their profit forecasts recently. North Korea is also a persistent headache.

Bad news is in the price

Note, too, that China has resorted to further stimulus while US growth has hardly fallen off a cliff, while the market's current price/earnings (p/e) ratio of nine is below the ten-year average. Arguably, then, the gloom is overdone and investors may be in line for not only rising stock prices, but rising dividends too, according to Credit Suisse, which reckons Korean stocks are a buy. The iShares MSCI Korea UCITS (LSE: CSKR) exchange-traded fund may therefore be worthy of further research.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..