Korea Strategy:Back to basics!

Event.

We have witnessed turbulence in capital markets since late 2015 driven byvolatility in oil prices, uncertainty on the Fed’s rate hikes, and concerns aboutsome EM economies. We think the normalization, which we highlighted in our2016 outlook (See Korea Strategy for 2016 – Another tough year ahead,however… 15 Dec 2015), has already been taking place, implying marketvolatility will decline. We think it is time to go back to basics.

Impact.

Market volatility will remain low until new drivers emerge: Over the pasttwo years, the macro numbers have been affected by oil price fluctuations,which should wane from 2H16. While the potential easing of disinflationaryconcerns will be positive, the impact might not be strong enough to drive themarket unless the global macro sees clear signs of improvement asvaluations have already largely factored in normalization, in our view.

Back to basics: We expect the volatility to decline until the market finds newdrivers. While we believe global oil prices have been key for the market overthe past six months, we think the three other key variables investors shouldbe bear in mind are: inventory, earnings growth, and payout ratio.