BNY’s Geoff Yu reports that South Korean equities, particularly in the AI and semiconductor sectors, are experiencing tightening financial conditions despite the KOSPI index remaining one of the top global performers [1]. According to iFlow data, there has been heavy institutional selling and extended outflows from South Korea, which began with risk-aversion in March and have continued into April [1]. These outflows are now exerting downward pressure on the Korean Won (KRW), especially as previous inflows during the market rally were largely unhedged [1].
The report highlights that short-term inflation expectations remain elevated, contributing to higher yields and impacting heavily positioned equity markets [1]. Additionally, increased input costs across Asia, including in Japan, South Korea, and Taiwan, are expected to persist, affecting net-energy importers and potentially weakening traditional trade surpluses [1]. This scenario is likely to result in further currency weakness due to lower net purchases, which acts as a form of onshore tightening and may necessitate interest rate hikes to counteract these pressures [1].
Recent policy responses in other emerging Asian markets, such as Indonesia and the Philippines, have included preemptive measures to address tightening financial conditions and inflation risks [1]. The best-case outlook, according to the analysis, is for an end to tightening through policy responses to supply risks and inflation, though significant adjustments in market positioning may still be required across heavily invested EM APAC markets [1].
CONCLUSION
South Korean equities, especially in the tech sector, are facing significant outflows and tightening financial conditions, which are pressuring the KRW and raising the likelihood of further policy action. Elevated inflation and input costs suggest ongoing challenges for the region, with market positioning likely to adjust further in response to these developments.