Korean Stocks Seen Outperforming the Won as Tensions Percolate

  • BofA Merrill’s Woo sees Kospi-won divergence widening further
  • Index anchored by earnings outlook; rates also weigh on won

Vanda CEO Ambrose on What's Driving the Markets

South Korea’s stocks and currency have largely brushed off heightened tensions on the Korean peninsula this year: the Kospi index is up 15 percent and the won has strengthened almost 7 percent, even as Pyongyang tested a volley of missiles and a nuclear bomb.

Now they may go separate ways.

While solid earnings and recovering exports will offset concerns about North Korea’s intentions and continue to underpin Kospi gains, it’s a different story for the currency, says Jaejoon Woo, chief Korea economist at Bank of America Merrill Lynch in Hong Kong.

“North Korea concerns will continue to haunt the currency and with accelerated capital outflows and the trajectory of the Bank of Korea’s rate decisions, the won will face more downside pressure,” says Woo, who sees the won falling more than 2 percent from current levels by year-end.

This will result in the gap between stocks and the currency widening further.

Analysts and traders, however, seem split on the won’s outlook. The currency, which traded around 1,135.15 per dollar on Wednesday, could slip to 1,140 by the end of 2017, according to the median of strategists’ forecasts compiled by Bloomberg. The forwards market, meanwhile, sees it gaining to 1,130.

“The Kospi index doesn’t represent the whole macro picture and is driven by exporters who are more reliant on the global economy,” said Chung Chang-won, a Seoul-based analyst at Nomura Holdings Inc., who expects the Korean benchmark to break 2,650 points this year and hit the 3,000 mark by the end of 2018. “And their earnings are very good,” he said.

Read more: Rattled South Korean Stocks Have a Secret Weapon: Earnings

As of 2:16 p.m. Seoul time, the Kospi was down 0.3 percent to 2,319.83, more than 5 percent below a record reached at the end of July. Earnings-per-share are expected to rise by 65 percent over the next 12 months, according to estimates compiled by Bloomberg.

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