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The Korean won has rallied sharply following the recent election, fueled by investor optimism over potential market reforms from the new administration. According to a new UBS report, this sentiment has also propelled Korean equities, with the KOSPI outperforming U.S. stocks by 20% year-to-date.
Strong portfolio inflows have driven demand for Korean assets, and the local bond market is now pricing in over a 1% fiscal expansion. While UBS views the reform agenda positively, analysts caution that execution challenges and cyclical pressures could temper gains in the coming months.
The won’s appreciation is largely attributed to increased equity inflows and reduced resident outflows. UBS notes the currency was undervalued in early Q2 but now appears fairly priced. Further gains toward the 1300 level would likely require an additional 10% rise in the KOSPI and a series of U.S. Federal Reserve rate cuts.
Notably, the National Pension Service (NPS) has paused FX hedging and repatriation, which previously supported the won. Instead, the NPS has intensified offshore diversification, and with the won stabilizing, hedging activity has diminished, UBS reports.
UBS strategists highlight the yen/won currency pair as a potential hedge against a global economic slowdown in H2. Historically, the pair shows an 85% correlation with cyclical versus defensive equity performance, making it a compelling risk management tool.
As South Korea enters a reform-driven phase, investor focus will remain on policy execution and external macro risks. The won’s trajectory and KOSPI’s performance are now key indicators for gauging global investor confidence in Korea’s economic outlook.
