Conviction Thinking Asia The making of a Korea macro trade

Conviction Thinking - Asia The making of a Korea macro trade Head of Asia Equity Strategy & Multi Asset Strategist The traditional relationship between the won and equities has broken down. This unusual Frank Benzimra dynamic is likely to persist for now, with capital flows rather than fundamentals driving the currency. As equity deleveraging matures, governance reforms advance and valuations discount Asia Rates Strategist Kiyong Seong severe EPS downgrades, we believe the KOSPI is positioned to recover. Whether Korea ultimately emerges as a global macro trade rather than simply a semiconductor story will depend on how Head of Research & Chief broadly the AI windfall spreads through the economy, in our view. Economist, APAC Wei Yao KRW/USD and KOSPI broken correlation APAC DM Rates Strategist 90% Stephen Spratt Rolling 1y correlation Average % Head of Asia Quantitative Research 70% Puneet Singh % 50% Head of Research for Japan and Japan Economist 40% Jin Kenzaki % Asia Equity Strategist 20% Rajat Agarwal % 0% Asia Equity Strategist Makhdoom Muteeb Raina -10% Aug May Feb Nov Aug May Feb Nov Aug May Feb Nov Aug May makhdoom- Greater China Economist Source: SG Cross Asset Research Michelle Lam India Economist − The won and the KOSPI have decoupled. Korea's equity rally has coincided with a weak Kunal Kundu currency as portfolio rebalancing flows. In addition, other flows factors such as ADR-related FX flows, shipbuilder hedging activity and retail capital allocation overwhelmed traditional macro Asia EM Strategist relationships. We turn tactically constructive on USD/KRW and favour building long Galvin Chia positions, targeting 1,470 over the coming months. − Equities: deleveraging done, EPS shock discounted. Retail-led leverage is normalising. Japan Macro Strategist Reo Sakida Valuations have reset to levels consistent with severe earnings pessimism. The next stage of the Korea story depends less on deleveraging and more on structural drivers- including a pursuit of governance reform and a broadening of profits across the economy. With contributions from Jafer Jang and − AI windfall: bringing it home. Korea's current-account surplus and semiconductor profits Ronaldo Gustaf have not translated into a stronger currency or persistent capital inflows. The challenge is to broaden the benefits of the AI cycle beyond the Tech sector and create the foundations for a stronger won and a structurally higher allocation to Korean assets.

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USD/KRW: FLOW REVERSAL IS BUILDING Asia Rates Strategist Kiyong Seong

We turn tactically constructive on USD/KRW and favour building long positions, targeting 1,470 over the coming months. USD/KRW has been unusually volatile and has displayed atypical relationships with traditional market drivers in recent quarters, reflecting the dominant influence of flow dynamics rather than macro fundamentals.

Strong positive correlation between USD/KRW and KOSPI Retail investors’ outbound investment has slowed

10,000 KOSPI Index, LHS USD/KRW, RHS 1580 6m rolling local outbound equity investment, USDmn 1560 USD/KRW, RHS 9,000 80, ,000 8, , ,000 50, ,000 6, , ,000 20, ,000 4, Jan-26 Mar-26 May-26 Jul-

Source: Bloomberg, SG Cross Asset Research

In our view, these unusual dynamics are likely to persist for now. Although the KOSPI has undergone a sizeable correction, its cumulative outperformance versus global equity benchmarks remains significant. At the same time, heightened volatility and growing concentration risk in semiconductor stocks could motivate foreign investors to trim positions into any recovery, particularly if domestic retail investors continue to provide support through strong inflows. The Korean won's…