Market Analysis: South Korea

The South Korean Economy has been growing since the end of the recession.  However, they are starting to run into problems of a few fronts.  As an export driven economy, they're losing business from the overall slow growth of the world economy.  China's change to a more demand driven economy are also contributing. Living next door to the world's craziest dictator does not help.  And finally there are a few structural issues that are contributing.  Overall, there are few signs that the economy will halt all growth, but there are several areas leading to slowing growth.

Let's flesh out the South Korean economy in a bit more detail by focusing on GDP

The above graph of year over hear growth in various GDP components shows that growth is occurring, but at a slower rate.  Manufacturing has slowed to a roughly 1.75% average over the last four quarters; private consumption has slipped to a 1.8% average over four quarters while investment and construction have been contracting.  And while exports are still positive, they are also slowing down.

The slowdown was noted in the latest policy release from the South Korean Central Bank where they lowered rates 25 basis points:
In Korea, exports have maintained their trend of recovery, albeit at a modest pace, but the Committee appraises economic growth to have remained weak, with indicators related to domestic demand alternating between improvement and worsening. On the employment front, the increase in the number of persons employed has accelerated, centering around the 50-and-above age group.  Going forward there is no change to the Committee’s forecast that the domestic economy will show a negative output gap for a considerable time, due mostly to the slow recovery of the global economy, to the influence of Japanese yen weakening, and to the geopolitical risk in Korea.

Like most economies, there is a projection for below trend growth caused in general by a slowing world economic situation.  There is also the issue of Korean goods competing against Japanese goods in the world market.  With Abenomics lowering the value of the yen, Korean goods are less competitive.

In addition to lowering interest rates, the Korean government has unveiled a supplementary budget that provides a measure of stimulus.

There is also this structural issue, which US readers should be able to assocaite with: a high level of household debt:

South Korean consumers are among the world’s most heavily indebted, with a household debt pile equivalent to about 160 per cent of annual incomes. The country’s financial authorities view this as one of South Korea’s main economic weaknesses, and as a major drag on consumer spending.
This factor will be contributing to slowing consumer spending growth for the foreseeable future.  And households are not the only sector that is being weighed down by an increased debt burden:

In most places in the world, companies and households have been reducing their debt burden. But in South Korea, leverage still remains too high. The top 30 conglomerates have 1,000tn won ($893bn) in debt according to one recent study. In the second half of last year, four of the top 12 groups were unable to cover their interest payments from operating profit.

Now, let's turn the toe South Korean ETF:

On the weekly chart, we see a consolidation triangle from mid-2011 to mid-2012.  Prices broke through resistance in the spring of 2012 and rallied a bit, but have been falling since the beginning of the year.  The fall was caused by the China slowdown and the drop in the yen, which competes with South Korea in the export market.  Also remember SK's northern neighbor is doing its best to destabilize the region.

 
On the daily chart, notice that there is little to no direction in the market at all.  We see the July-February rally, but also note the trend break in the Spring.  The current EMA picture is muddled; all are entangled close to the 200 day EMA with no one giving any meaningful directional signals.  Momentum has been mostly weak.  The CMF tells us there is some money flowing into the market.

The SK ETF is directionless right now.  Traders are most likely waiting for a clearer set of fundamental economic signals before firmly committing to the market.