BNY’s Geoff Yu highlights that South Korean equities, especially AI and semiconductor names, face tightening financial conditions even as the KOSPI remains a top global performer. iFlow shows heavy institutional selling and extended outflows, which could now weigh on the Korean Won. Elevated inflation expectations and higher input costs across Asia suggest ongoing pressure on EM APAC positioning.

Tech-led KOSPI strength meets heavy outflows

"Using our iFlow EM leading indicator, which aggregates daily cross-border security flows and matches them against official data, the sharp outflows from outright risk-aversion in March have extended well into April. As iFlow had signaled that flows into South Korea during the rally were increasingly unhedged, renewed outflows could generate the opposite reaction in KRW performance, even though valuations remain attractive due to healthy export trade surpluses."

"Further, short-term inflation expectations will remain elevated, feeding into yields and heavily positioned equity markets. There will also be a medium-term lift in input costs for Japan, South Korea, Taiwan and most net-energy importers, which will take time to normalize and encumber traditional surpluses. The resulting weakness in currency performance from lower net purchases constitutes a form of tightening onshore, requiring rate hikes to overcome."

"We’ve already seen preemptive measures in Indonesia on Wednesday and the Philippines earlier this month. The current best-case scenario is for an end to tightening in financial conditions through a policy response to supply risks and inflation – and even then, positioning may need to adjust significantly across the heavily positioned EM markets in APAC."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)