Global custodian bank State Street forecasted that the Korean stock market will rise further in the second half of this year. The reason is that domestic corporations' profits are solidly increasing, and there is a high possibility that the trade negotiations led by the Donald Trump administration will be quickly concluded.
State Street positively evaluated U.S. stocks because the profit growth of technology stocks continues. On the other hand, it advised domestic investors to reduce their holdings of U.S. Government Bonds, keeping in mind the possibility of a sharp rise in interest rates (price decline).
Ben Luk, senior multi-asset strategist at State Street, said during a media roundtable held at State Street's Seoul office on the 17th, "Although Korean stocks have recorded a rise this year (22.96% year-to-date rise based on the KOSPI index), I believe there is room for further increases," and noted that "if the growth of corporations' profits is supported, an additional double-digit percent increase is possible."
Founded in 1792, State Street is the second oldest bank in the United States. It serves global pension funds and asset management companies. As of the end of March this year, the amount of assets under custody and management reached $46.7 trillion (approximately 6 quadrillion 3500 trillion won), accounting for 12% of global assets. The domestic custody and management assets are also around $500 billion (approximately 680 trillion won). State Street is analyzing data based on this and quickly providing market information.
State Street projected that the major stock indices in emerging markets would rise by an average of about 20% in the second half of this year. This is the first time State Street has expressed a positive view on emerging markets since 2022. According to State Street, given the investment proportion of institutional investors, there is significant potential for increases.
The two main grounds for strategist Luk's view that Korean stocks will rise further are as follows. First, the growth rate of corporations' profits has risen to around 15%. This indicates that the fundamentals, particularly in Korean technology stocks, are robust.
The fact that Korea, together with Japan, will quickly conclude trade negotiations with the United States was also cited as a reason for optimism in the stock market. This is also tied to the exchange rate. Korea is recording a trade surplus against the U.S., and to reduce this, a strong won against the dollar is ultimately needed, Luk explained. The value of the won based on purchasing power parity (PPP) is currently undervalued by 18% against the dollar.
State Street predicted that the exchange rate of the won against the dollar would drop to 1,330 won in three months and 1,300 won by the end of this year (which indicates an increase in the value of the won). If the value of the won rises, foreign investors can gain from currency exchange profits.
State Street also predicted a positive trend for U.S. stocks. It is said that institutional investors, who are clients of State Street, are maintaining a high proportion of U.S. stocks. This is because the earnings per share (EPS) of technology stocks is growing to be 200 times the average of other U.S. stocks.
On the other hand, it advised to reduce the investment in U.S. Government Bonds. State Street is seeing that the Federal Reserve is expected to lower the benchmark interest rate once this year. This differs from the expert consensus of 2 to 3 rate cuts this year.
The solid impact of hard indicators such as prices and employment, which the Federal Reserve considers when making monetary policy decisions, is significant. State Street internally rates inflation indicators daily. They measure the prices of a product group that determines the Consumer Price Index (CPI) daily through over 10,000 online distribution channels. Comparing inflation trends over the past 10 years with this year's inflation trends, there are currently no significant signs threatening inflation from tariffs or other factors.
The Federal Reserve also places great importance on whether American corporations can stably finance themselves through asset markets, which is well illustrated by the gap between high-yield bonds (high-revenue, high-risk bonds) and U.S. Government Bonds. Generally, when the gap between these two reaches 800 basis points (1 bp = 0.01 percentage points), it is seen as a sign that the financial market is tightening, prompting the Federal Reserve to cut interest rates. Currently, the gap is at around 300 basis points.
There is also the burden of term premium. Term premium refers to the additional yield provided to encourage investors to invest in long-term bonds, taking on risk and uncertainty.
When the proportion of holdings in U.S. bonds and stocks shows a negative (-) correlation, the term premium based on 10-year U.S. Government Bonds was at an average of 0.7%. However, this year, the correlation turned positive (+), and the term premium rose to 0.9%. State Street believes it could increase to 2.5%.
Simply put, this means that investors require more than double the term premium, indicating that U.S. bond yields must rise higher than they currently are. Since bond yields and prices move inversely, this means bond prices would fall.
Given the high likelihood of a sharp rise in U.S. bond yields, State Street also presented a 'neutral' outlook for Korean Government Bonds. Strategist Luk noted, "I expect the Bank of Korea to lower the benchmark interest rate once more this year," but added that "if U.S. bond yields rise, relatively low yields on Korean bonds will be less attractive."
Strategist Luk assessed that the impact of the Israel-Iran conflict on the asset market would be limited. In contrast to the geopolitical conflict between the U.S. and China over Taiwan, the Israel-Iran conflict does not significantly affect supply chains.
Luk stated, "While the Israel-Iran conflict may shock the market in the short term, the possibility of Iran blocking the Strait of Hormuz, which could impact trade overall, is low, limiting the conflict's influence."
He also remarked, "Although political and economic uncertainty indicators have risen to high levels this year, the volatility in the asset proportion is not significant," adding that "institutional investors have particularly returned to prefer risk assets like stocks since last May."