South Korean stocks are among the world’s worst performers this year, as its export-focused companies grapple with not one but two trade fights and slowing global growth. The economy contracted in the first quarter and in July the central bank made a surprise cut to interest rates, downgrading inflation and growth forecasts for the year. To make things worse, the country finds itself caught in the crossfire of U.S.-China trade tensions, and is embroiled in its own trade dispute with Japan, while neighboring North Korea has been conducting weapons tests. “South Korea is an economic bellwether,” said Jeroen Blokland, a multi-asset portfolio manager at Robeco. “If there’s a global slowdown, it is among the countries that gets hit the hardest.” Mr. Blokland said he has trimmed his exposure to emerging-market equities over the past few months, leaving him underweight South Korea, or holding a smaller position than the benchmarks he tracks. He said slowing global growth, coupled with falling earnings expectations for South Korea, made the market less attractive than many others. As of Thursday, South Korea’s main Kospi index was down 4.4% this year, making it the only large market in negative territory for the year. That compares to a 17% rally for the S&P 500 and a 16% gain for the Shanghai Composite. In dollar terms, South Korean stocks have fared even worse, since the Korean won has fallen more than 7% this year. Goldman Sachs recently cut its forecast for Korean economic growth this year to 1.9%, from 2.2%, citing falling exports. Charlie Lay, a strategist at Commerzbank, said exports had been hurt by falling semiconductor sales, which typically make up about a fifth of exports. U.S.-China tensions affect South Korea, since it is a large exporter of microchips and other components to China, which then sells finished products to the U.S. and other markets. Meanwhile, relations between Seoul and Tokyo are at their frostiest in decades, with the two countries dropping each other as favored trading partners and Japan enacting export curbs. One consolation for overseas investors: Samsung Electronics has rallied 14% this year. Samsung’s $245 billion market capitalization is bigger than the combined value of the next 13 biggest companies in the Kospi Composite, and the electronics giant is more widely held by foreign shareholders than many smaller stocks. —Nayoung Kim contributed to this article Do you think South Korean stocks will keep declining? Let the author know your thoughts at steven.russolillo@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location. |