How is tapering from the US affecting one of the best performing emerging market in 2021?

 

The COVID-19 has resulted in unlimited quantitative easing not seen in history. As the stock and property markets have skyrocketed with so much money in circulation, the Federal Reserve is expected to raise the interest rate before the end of the year 2021.

 

The Korean stock market has performed very well, with the KOSPI index rising up to 3,300 from its low about 1,400 in 2020. However, it now has fallen into the correction territory.

 

KOSPI in correction

Source: Investing.com

 

There are a number of reasons as to why this is happening.

 

  1. Korean market is a liquid stock market:

Korean stock market is one of the most attractive emerging markets, with transparent financial system and no capital control imposed in the finance market. Unlike China, foreigners can freely invest in the Korean stock market just like other advanced economy.

 

While this is a good feature when the stock market is performing well, when the stock market is declining foreign investors can quickly take the profits by shorting the Korean stocks and go back to their home country.

 

Recently, the Korean stock market has been driven down by sell-off from foreign investors.

 

  1. Korean market is highly dominated by semiconductor companies:

 

Semiconductor stocks has been hit hard, as there is a growing concern that D-ram price is set to decline with growing inventory and excess supply. Broad semiconductor industry declined as a result, and other semiconductor companies like Micron and TSMC also suffered.

 

As South Korea’s two largest capitalization companies—Samsung Electronics and SK Hynix which take up about more than 20% of the KOSPI index—declined about 20% in their share price, the broad Korean stock market and semiconductor equipment companies also suffered as investor sentiment deteriorated.

 

  1. Rising exchange rate (KRW/USD) makes it more foreign investors to sell Korean stocks, exchange it for USD and then move back to the US:

 

With earlier than expected tapering and subsequent rise in US interest rate, the USD is also expected to appreciate against other foreign currencies. As a result, the KRW/USD exchange rate also showed a sharp increase, which makes it more attractive for foreign investors to sell the Korean stocks and exchange Korean won for USD and then go back to US stock market.

 

There is a historical inverse correlation between the KRW/USD exchange rate and Korean stock market, which also has played a key role in the recent pull back. You can also refer to this article.

KOSPI and exchange rate inverse relationship

Source: Capital IQ

 

The investor sentiment has turned around as the Korean stock market suffers from the rising exchange rate and weakness in semiconductor sector. However, the Korean economy is still well poised for Post COVID-19 digitalization era, with a sound economic recovery stemming from increasing exports. This may be a good opportunity to buy in the dip.

 

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