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Korea Rallies Even Harder
Korean equity indices continue to outperform sharply, pulling away from the rest of EM in the past two quarters. The "big" story here, of course, are the tech names, which have rocketed skywards in the second half alongside their global peers. We have little to say about this trend, as it has nothing to do with underlying macro conditions in Korea and everything to do with the global tech bubble.
The other main story, though, is the sudden, ongoing rerating of the rest of the index, as "domestic Korea" continues to jump on promises of corporate reforms - at a time when there's absolutely zero support from macro. Korea's economy is flatlining or contracting almost everywhere we look, including durables, construction, retail, exports, credit and earnings, and while governance changes can adjust the distribution of income between managers and shareholders of listed firms it's unclear whether they would have any meaningful impact on aggregate demand.
As a result, it's hard to motivate this rerating. Valuation multiples can still increase as the "Korea discount" narrows, but this is already a strong vote of confidence in a package that doesn't necessarily impact aggregate earnings and growth potential. I.e., we fear market momentum has run ahead of reality, and it's hard to see significant upside from here.
Korea Rallies Even Harder (PDF)
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