Hong Chun-uk recommends rebalancing with US Treasuries as Korean stocks fall cheap

Dr. Hong Chun-uk suggested rebalancing portfolios with US Treasuries and cheap South Korean stocks following a difficult October where foreign investors used the Korean market as a "cash machine" due to a strong won. The strategy comes as market volatility is expected to persist through mid-November due to the US midterm elections and a massive IPO for Entropy.

The South Korean stock market experienced a difficult period this past October due to a lack of supply and demand and increased external volatility. While both the S&P500 index and the KOSPI showed downward trends, the South Korean market, in particular, underwent a correction as it reacted sensitively to global variables.

According to the October market analysis provided by Dr. Hong Chun-uk, the decline in the South Korean market can be summarized by three main causes. First, the momentum that had supported supply and demand, such as share buybacks by major companies including Samsung Electronics and SK hynix, was exhausted. Additionally, as the Korean won showed relative strength amid a strong dollar driven by rising global interest rates, foreign investors decisively engaged in large-scale selling by utilizing the South Korean market as a "cash machine." The analysis suggests that because the value of the won rose against the dollar, foreign investors did not face significant losses even when selling stocks.

Furthermore, growing concerns regarding whether large-scale investments related to Artificial Intelligence (AI) are sustainable in a high-interest-rate environment also pressured the market. Dr. Hong described the South Korean market as a "country at the tip of a whip," meaning that the market is structured such that even a slight shake of the "handle"—the advanced nations or the global market—causes the "tip" where South Korea is located to fluctuate greatly. In fact, the market's sudden rebounds following specific issues, such as the news of Entropy's listing, demonstrate that the supply and demand in the South Korean market is very thin and sensitive to changes in external conditions.

Correlation between European economic instability and US Treasury yields

The recent decline in US Treasury yields is rooted in economic instability in Europe. As the European situation persists, such as the crisis regarding a potential sovereign credit rating downgrade for France, European investors, centered around Japan, have shown a preference for safe-haven assets and moved funds to the United States. The analysis suggests this is not because the US economy has stabilized or US debt issues have been resolved to lower interest rates, but rather a result of "flight to safety" induced by fear regarding Europe's low growth and debt repayment capabilities.

The economic crisis in Europe could also deal a serious blow to its industrial structure. Europe, including France, is a region with strengths in service and consumer goods industries such as fashion, tourism, wine, and food. However, concerns have arisen that if the economy contracts and tourist inflows decrease due to recent social unrest and looting incidents, the foundation of the European economy could be shaken. This uncertainty led to a sharp plunge in the value of the Euro, which was subsequently followed by a pattern where the Euro value temporarily rebounded, calming the strength of the dollar.

November large-scale IPO variables and asset allocation strategy

The investment market remains highly volatile in November. This is because the aftermath of the European situation is likely to persist along with the results of the US midterm elections. An event to watch particularly closely is the large-scale initial public offering (IPO) of Entropy. Dr. Hong expects the scale of Entropy's IPO to reach the level of SpaceX, warning that massive amounts of market liquidity could be absorbed as funds concentrate on that IPO. As these events are concentrated between the early and mid-parts of November, it is difficult to feel at ease regarding the market.

In this volatile market, the strategy presented by Dr. Hong Chun-uk is "rebalancing." He stated that he secured the bottom of bond prices through rebalancing by selling US stocks and buying US Treasuries last week. For future strategy, he recommended paying attention to South Korean stocks, which currently possess very attractive pricing, alongside a strong preference for US Treasuries as a safe-haven asset. Dr. Hong evaluated that "South Korean stocks are at a level worth considering for rebalancing, not simply because they are pretty, but because they are so cheap," emphasizing the importance of a strategy to endure volatility through asset allocation.

Source: original video (YouTube)