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Asia’s Most Sought-After Emerging Market Is About to Get Hotter


By Heejin Kim and Hooyeon Kim


  • Memory chip upcycle to send Kospi to 3,200: JPMorgan

  • Won could test 1,000/dollar next year: Bloomberg Intelligence

For investors seeking to ride the global reflation story in 2021, South Korea appears to be one of the hottest places in Asia.

Global funds are buying shares in the nation’s tech-heavy stock market at the fastest pace in four years this quarter, helping to make the Kospi Asia’s best-performing major benchmark in 2020. At $58 billion, their purchases of local bonds this year are on course for a record. And the won is tussling with the yuan for the region’s No. 1 spot.

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Next year is shaping up to be another bullish one for Korean assets even as coronavirus infections are rising. A revival of the memory chip cycle is forecast to pull the local economy out of its first recession from 1998, prompting JPMorgan Chase & Co. to predict the Kospi will hit 3,200 by the end of 2021. The won could test 1,000 a dollar, a level unseen since the 2008 global crisis, according to Bloomberg Intelligence.

“I continue to be constructive on the Korean economy and more so on tech stocks,” said David Chao, a Hong Kong-based global market strategist at Invesco with $1.2 trillion of assets. “The industry is bolstered by strong exports driven by an investment upcycle that’s only starting to take off. After a challenging year, the semiconductor industry is finally starting to shine.”

Analysts too are turning increasingly positive. Earnings for companies on the Kospi are forecast to grow 43% in 2020, one of a handful of indexes that will see profits expand during the Covid-19 outbreak. That’s versus a 7.2% drop predicted for S&P 500’s companies. For 2021, Kospi’s profit growth is estimated to be twice the U.S. gauge’s.

The rosy prospect of earnings is backstopped by the latest trade data, which shows that the recovery in Asia’s fourth-largest economy is broadening beyond the semiconductor industry. Cyclical sectors including automobiles and petrochemicals will lead 2021’s equities rally, making a classic case of the reflation trade that resembles a market boom in the wake of 2009 global crisis, Hyundai Motor Securities wrote in a report.

“We are optimistic about the Korean market next year because of the surge in high-tech spending that is taking place around the world,” Mark Mobius, co-founder of Mobius Capital Partners LLP, said in an email. “We already have a substantial holding in Korea and will continue to hold it.”Mobius Optimistic

Korean exports jumped 27% in the first 10 days of December, aided by a 52% surge in semiconductor shipments, official data showed on Friday. Overall, Bloomberg surveys show that exports may rise 5.5% next year after declining 3.9% in 2020, helping the economy to grow 3.2% following a contraction of 1.1% this year.

That said, the Kospi’s 26% jump this year -- which puts it on course for its best annual performance since 2009 -- has also boosted its valuation. The gauge is trading at 13.7 times its 12-month forward earnings, versus a five-year average multiple of 10.5. That, along with escalating coronavirus cases in the nation could act as a deterrent for some investors.

Foreign Flows

For now though, the rebound in trade is luring active investors and also driving passive flows into Korea exchange-traded funds. That’s helped the won gain more than 6% this year, while local-currency bonds have returned 8.2%, beating an average gain of 6.8% in global emerging-market notes, Bloomberg Barclays indexes show.

Korean assets may attract more flows as long as expectations continue to build for further dollar weakness and a rebound in growth in a post-vaccine world. At 30%, foreign ownership of local stocks remains near the lowest level from 2016.

“Extra liquidity would have to look for investment opportunities and investors may be drawn to 5G-related stocks in South Korea,” said Bloomberg Intelligence’s currency strategist Stephen Chiu in Hong Kong, expecting these flows to lift the won toward 1,000 next year.

— With assistance by Ishika Mookerjee

(Adds Mark Mobius comments in the seventh paragraph and latest exports data in the eighth.)

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