Morgan Stanley Fixed-South Korea Mid-Year Outlook Structural Factors Matter-108520656.pdf

MForanlysraSouthKoreaMid-YearOutlook|AsiaPacificStructuralFactorsMatterMorganStanley&Co.Internationalplc,SeoulBranch+JoonSeokEquityAnalystJoon.Seok@morganstanley.com+822399-4934MorganStanleyAsiaLimited+KathleenOhChiefKorea/TaiwanEconomistKathleen.Oh@morganstanley.com+8522848-7340GekTengKhooStrategistGek.Teng.Khoo@morganstanley.com+8523963-0303MorganStanley&Co.Internationalplc,SeoulBranch+HeewonChoiEquityAnalystHeewon.Choi@morganstanley.com+822399-4836MorganStanleyAsiaLimited+MichelleKimResearchAssociateMichelle.Kim1@morganstanley.com+8523963-01831H24wasmainlyaboutAIandthecapitalmarket/corporatereformagenda,withtheKOSPIonarollercoasterride.Wethink2H24couldbebetterthan1Hifstructuralfactorsintertwinewithcyclicalrecoverybutrisksremainonmacroandgeopoliticalside.:34562457689026925Ke6yDv58lop22v8po892mnsTLkfr2KOSPIperformancefor1H24YTD(-0.3%asofMay30)iswithinourexpectations–wehadexpectedittobeweaker.Themainstoryin1H24wasthe"value-up"program,whichhasledtoatopsy-turvyKOSPItrendYTD–weexpecttheKOSPItofinish1H24onaweaknote.Co52:gcLa2802e9O54d54u34789l2d5540r2Keyreasonsappeartobe:(1)highersensitivitytoglobalmacroconditions–risingrates+strongerUSD;(2)lessbreadthofAI-linkedstockswithSamsungElectronicsnotinthefray;(3)EVbatteryvaluechainfacingstructuralheadwinds;(4)corporatereformawait-and-seesituation.*fpiF+fpiF,p-F.,DDFfm"F.ifeFdf+ecFp+imfehcpF)ceF/0/1"FWesetourKOSPItargetforJune2025at2,850and3-6monthtradingrangeat2,550-2,800.Weexpecttoseemixedsignpostswithmacroconditionsbeingstableasgrowthisshown,butratesthatcouldbehigherforlonger,whileweexpecttheKRWtoremainweakduring2H24.GeopoliticswillbeaswingfactorwiththeUSelectionscomingup.Mid-cycletransitionisgettingdelayedeveninourbasecase,butisnearing.•Fedpolicydecision(firstcutinSeptember)mattersmorethanBoKpolicydirection(firstcutinOctober)forKoreanequitiesasbothlocalinterestratesandUSD/KRWwilltaketheircuefromtheUS.WeexpectKRWtoremainweakduring2024–MorganStanley"send-2024USD/KRWforecast:1,400.T2yeyy2342y8upD3uu2u342S6d8p6y2764X5psS34d346p5245u34726l59O6VWefindthatinvestorsdonotdoubtgovernmentcommitmenttothereformdrivebutexecutioniskey.Potentialcatalysts:(1)capitalmarket/corporatereformagendabecomingamorebipartisaninitiativedespitesomedifferenceinviews;(2)participationlevelhigherthanmarketexpectationsofthevalue-updisclosurescheme;and(3)inclusionintotheWorldGlobalBondIndex(WGBI).Moreclarityisneededforshort-sellbanpathbutend-Juneliftinglookstobelesslikely,inourview.Ifreformdriveshowsdiscernibleprogressandintertwineswithcyclicalrecovery,theKOSPIcouldgetclosertoourbullcaseof3,100.Cv56X89l205Sp3426yy3S6p839269O2E3Se02U80pr2Upgradeconsumerstaplestooverweightastherearemoreexportersandoutboundstockswithinthesector(Amorepacific,KT&G).OverweightsectorsarenowIndustrials,Autos,Banks,ITandStaples;Materials,EnergyandDiscretionaryareourunderweights.Stillpositiveonchipsbutbroadeningtonon-chiptech,multipolarworldbeneficiaries(defense,shipyards),energytransition(nuclear,overseasEPC)playsandK-waveexporters.RemoveSamsung(005930.KS)fromourF