Korean Macroeconomic Outlook

Currency The Korean Won (KRW) has suffered in recent months. Between March and June it depreciated approximately 5% against the USD. South Korea (and the KRW), despite being one of the world's largest economies, is not regarded as a safe haven. With present economic turmoil, most money is heading towards other currencies, such as the USD, GDP or CHF. The worries surrounding North Korea are not helpful either. A rate cut would exacerbate this situation. However, shorting the KRW versus the USD may be a good short term strategy, whether the interest rate is cut or not, should global economic uncertainty continue. Depreciation in the KRW is expected to persist for the time being. Equities Weak growth in the Korean equities market may be one of the main incentives for a rate cut. With unemployment recently falling to 3.2% (a four month low), the KRX may be ready for another surge, should the cheaper borrowing costs and greater consumer spending that a rate cut would bring arise. Now may be the time to go long on the KRX index, or some of the top 10 conglomerates ('chaebol') that account for over 50% of the total market capitalisation - such as Samsung, LG, Hyundai, Hanhwa and Kumho. Government Bonds Should the interest rate be cut then government bonds trading in the secondary market will naturally increase in price. The best way to take advantage of this volatility would be to buy longer-dated bonds, as they will increase in price by a larger amount due to the duration effect. Real Estate House prices have been declining for some time, particularly in Seoul. If an investor has cash available, this might be the right moment to buy real estate. Following an interest rate cut, buyers will be able to access cheaper loans and the demand for housing should increase. With rental prices at a 15 year high, real estate in Seoul may still be a worthwhile long term investment even if an interest rate cut does not materialise.