Korea equity market outlook

I think there are a few reasons why investors may want to be overweight Korean equities heading into 2024. The recent market correction over the past couple of months appears to be good entry point for the upcoming year. The short-selling ban is a tailwind in the 1H of 2024 and improving semiconductor fundamentals driven by an export and earnings recovery should provide a boost in the 2H.  

I think the macro environment with China may be improving, the government stimulus measures are taking effect and consumer confidence is improving, albeit slowly. This could lead to Korean exports upside in the coming year.  I think Korean stocks could act as a proxy for owning Chinese stocks, given the significant trade and investment between these two countries. Korean stocks are certainly one of the first places that investors may look at if choosing to recalibrate in North Asia.

Also, the US Treasury Department officially removed Korea from its foreign exchange monitoring list. While this has minimal implications on the domestic currency and equity market, it is a welcomed development and lowers the overall macro risks for owning Korean assets.    

Within Korean stocks, the semiconductor sector continues to look attractive at these valuations. It’s apparent to me that the industry is likely to have a very long runway for future growth given more muscly government support of the industry and a further upcycle in semi demand driven by this new wave of AI capex investment. In addition to semis, I also like other key exporters such IT hardware, auto parts and industrials. These sectors could benefit especially when the global economy sets to improve in the 2H of 2024. The Korean defense sector also looks appealing given the two wars being fought in the Middle East and Europe. It’s apparent to me that most countries would look to increase their military spending budgets because of increasing geopolitical tensions.       

For investors on the hunt for yield, Korean financials offer attractive valuations and offer dividend yields around 5-9%. To note, KOSPI’s dividend yield has increased over the past 10 years (2013 – 2022) from 1.3% to 2.2% and the index is up around 12% over the same period.¹

Overall, I’m bullish on Korean equites as I expect a strong corporate earnings recovery in the coming year. I think a good strategy for Korean stocks heading into 2024 is to look for companies that have double-digit earnings growth and with +4% dividend yields. Many of the financials and a few of the conglomerates fit the bill.    

I think the greatest risk for owning Korean stocks, lies in its falling demographic trend and the impact this has on the economy. The country has the lowest birth-rate globally, and so it will be up to the government and corporates to respond with measures to balance against this longer-term structural headwind. Still, the impact on the economy may not be as bad as it seems.  

Another risk may come from the upcoming general election in April 2024 since current polls are mixed. But I think recent policymakers’ initiative to improve Korean corporate governance and shareholder returns are likely to continue regardless of which party is in power. Retail investors participation has increased to around 30% of the total voting population, up from 10% pre-COVID.²

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.