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Korea Tries to Make a Stand as Markets Crumble

Korea Tries to Make a Stand as Markets Crumble

(Bloomberg) -- South Korean shares are trying to find a bottom as a volatile week draws to a close, rising for a second consecutive session. Still, the small victory for Korean investors may be cold comfort as the outlook remains grim for the nation’s stocks in the face of growing economic risks at home and abroad.

The Kospi Index is clinging to a 0.3% advance Friday, looking to close out a dismal month on a positive note after erasing gains for the year earlier this week. The rise is all the more impressive, coming amid the new front announced in the trade war -- President Donald Trump’s tariff plan for Mexico.

Korea Tries to Make a Stand as Markets Crumble

Sentiment got a boost as April industrial production topped economists’ forecasts -- up 1.6% on the month versus 1% estimated. The improvement was led by growth in the semiconductor, petroleum refinery and autos industries, according to Citigroup Inc. analysts Marie Kim and Jeeho Yoon.

But don’t count on Korea being out of the woods yet.

“The better April data is in line with the ‘not worsening’ April exports data,” the analysts said in a note to clients. “We don’t expect this positive momentum continued in May.”

Investors also got little support from the Bank of Korea, which left its benchmark interest rate unchanged, as widely expected. BOK Governor Lee Ju-yeol acknowledged the difficulties the export-dependent economy is facing with the re-escalation of U.S.-China trade tensions. Among other central bank concerns are record household debt and the recent slide in the won.

Kathleen Oh, Korea economist with Bank of America Merrill Lynch, is another worried about its economic prospects. She’s trimmed her growth forecast by 20 basis points to 2.2% for 2019, and warned CPI inflation will rise a paltry 1.0% this year and 1.2% in 2020, well below central bank targets.

“The re-ignition of the trade war is set to erode Korea’s real export and overall growth path,” Oh said in a report this week. “In our latest analysis of the effects of the trade war on Asia-Pacific exporters, we find Korea remains the most vulnerable.”

Oh’s base case for the current trade conflict is an “extended period of brinkmanship” leading to more than a month of stand-off between the U.S. and China before a partial deal. In this scenario, negative spillover into Korea’s exports is inevitable, she said.

The combination of weak economic growth and low inflation means the BOK will cut rates in the fourth quarter of this year, an acceleration from Oh’s previous call of the first quarter in 2020.

“If our brinkmanship scenario develops into a full-on trade war, an earlier cut could be made, possibly followed by another cut in 2020,” she said.

The Kospi remains well behind its global peers so far this year, little changed compared to a 8.9% rise in the MSCI All-Country World Index.

Stock Market Summary

  • MSCI Asia Pacific Index ex-Japan up 0.4%
  • MSCI Asia Pacific Index up 0.2%
  • Japan’s Topix index down 0.7%; Nikkei 225 down 0.9%
  • Hong Kong’s Hang Seng Index down 0.2%; Hang Seng China Enterprises up 0.1%; Shanghai Composite little changed; CSI 300 little changed
  • Taiwan’s Taiex index up 1.1%
  • South Korea’s Kospi index up 0.3%; Kospi 200 up 0.2%
  • Australia’s S&P/ASX 200 little changed; New Zealand’s S&P/NZX 50 little changed
  • India’s S&P BSE Sensex Index up 0.6%; NSE Nifty 50 up 0.7%
  • Singapore’s Straits Times Index down 0.6%; Malaysia’s KLCI up 0.5%; Philippine Stock Exchange Index up 1%; Jakarta Composite up 0.9%; Thailand’s SET little changed; Vietnam’s VN Index down 0.3%
  • S&P 500 e-mini futures down 0.7% after underlying index closed up 0.2% last session

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Adam Haigh

©2019 Bloomberg L.P.