HSBC On KRW Underperforming Better Exports/Equity Inflows

The bank weighs in on KRW underperformance to better equity inflows/improving export growth trends. It notes that domestic capital outflow pressures remain firm, while the export recovery has been narrowly based. See below for more details:

HSBC: "The KRW has been struggling, despite a rebound in exports and sizeable equity inflows from foreign investors - the two things that suggested KRW appreciation in the past. We think there are two main reasons:

1. Narrow-based exports recovery. The recovery in exports (10% y-o-y in January-May) has been mostly due to tech exports (30%), while non-tech exports are barely growing (3%). Even within tech exports, memory chips have dominated. Considering how capital intensive the semiconductor business is, and the industry trend of increasing manufacturing capacity in the US, it is possible that the tech trade surplus has been recycled as new outward direct investments (ODI).

2. Rise of the retail investors. In January-April 2024, foreign investors bought USD14bn worth of Korean stocks, which was slightly larger than what they bought in the entire 2023 (USD12bn). But this is not as impressive as what non-financial corporates and households in Korea have done. In January-April 2024, they bought USD12bn worth of foreign stocks and bonds, six times larger than their outflows in 2023 (USD2bn). Retail investors are now the dominant source of portfolio outflows - their outflows year-to-date have exceeded the outbound investments by financial institutions in Korea and by the National Pension Service."