Improving Korea fundamentals but pressured by flows: Morgan Stanley sees mild KRW appreciation
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Improving Korea fundamentals but pressured by flows: Morgan Stanley sees mild KRW appreciation
The report states that although the won has looked weak relative to other Asian currencies year-to-date, Korean exports, the current account, growth and interest-rate differentials have shifted to support it, suggesting room for moderate appreciation, while foreign investor selling of Korean stocks and outward investment pressure remain constraints.
- The won's weakness is mainly not driven by a deterioration in trade fundamentals but by a stronger USD, foreign investor selling of Korean stocks, increased FX hedging, and incomplete conversion of exporters' US-dollar revenues.
- Korea's fundamentals have turned supportive of the won: 2026 GDP growth is projected at 2.8%, 1H26 export growth is 47.7% year-on-year, and the January–May current account surplus reached US$141bn.
- Morgan Stanley expects better conversion of exporters' foreign-currency receipts, stronger corporate tax payments, and chipmakers' domestic capex to add KRW demand.
- Foreign investor equity outflows are expected to continue through 2H26 but at a slower pace; Korean retail repurchasing of overseas equities may create additional but manageable outward pressure.
- Absent broader USD weakness, the report expects USD/KRW to stay in roughly a 1,490–1,560 range, with more downside room opening only if it moves below about 1,485.
Report interpretation
Overview
This report explains why the won has remained notably weak despite current-account surpluses, strong exports, a sharp KOSPI rally, and improving Korean growth. It attributes the weakness to capital flows rather than core fundamentals: foreign investors selling Korean equities, FX hedging activity, Korean households and institutions investing overseas, exporters not fully repatriating USD receipts, and USD strength driven by renewed Fed-hawkish repricing expectations. Morgan Stanley overall believes Korea's fundamentals have become supportive of KRW and see room for moderate appreciation, but capital outflows will cap it.
Core views
Key views include: first, the won appears relatively weak versus other Asian currencies despite strong Korean fundamentals, with its valuation discount similar to INR and IDR, yet Korea does not face comparable balance-of-payments pressure. Second, foreign equity outflows and FX hedging have weakened the traditional relationship in which a rising KOSPI supports KRW strength, though the report says this is not enough to confirm that KRW and KOSPI have shifted to a persistent negative correlation. Third, export recovery, record current account surpluses, BoK turning to a rate-hiking path, and Korea's relative growth advantage over the U.S. form the medium-term foundation for KRW appreciation. Fourth, Korean equities remain constructive, with a KOSPI target of 9,000 and the bull case at 10,500 favored over the bear case at 6,500, but more choppiness is expected in 2H26.
Analysis framework
The report uses a multi-dimensional framework covering macro FX, balance of payments, capital flows, equity strategy, and the yield curve to analyze KRW. The FX section compares KRW valuation, current account, terms of trade, foreign equity flows, corporate and household FX deposits, exporters' remittance behavior, and KOSPI correlation. The macro view tests whether growth, exports, current account, and the BoK policy path are supportive of the won. The equity strategy section assesses foreign investor positioning, Korean retail overseas allocation, NPS rebalancing, and the composition of KOSPI gains. The rates section uses an excess term premium model to assess whether the 2s10s KTB curve is near fair value.
Methodology notes
The current account surplus, growth in financial account assets, reserve asset buffers, and capital outflows together determine won pressure.
The report emphasizes that although Korea has maintained a current account surplus over the long term, the expansion in financial account assets and the compression of reserve-asset buffers leave the won under structural depreciation pressure.
The level of foreign investor stock flows and FX hedging can change the traditional positive correlation between KOSPI gains and KRW appreciation.
The report notes that KRW has sometimes strengthened when KOSPI pulled back recently, but says the sample is still too short to confirm a persistent shift to long-term negative correlation.
The Korea 2s10s KTB curve is assessed using policy-rate differentials, inflation volatility, and U.S. term premium conditions.
The model indicates the Korea 2s10s curve is roughly at fair value, so the report’s stance on current rates is neutral.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- KRW / USD/KRWPrimary research focus
- Strengths
- A rebound in Korean growth, strong exports, a record current account surplus, BoK turning to hikes, and improving exporters' remittance outlook support KRW.
- Weaknesses
- Foreign investor stock outflows, incomplete onshore conversion of corporate USD receipts, overseas investment by Korean households and institutions, and shrinking reserve-asset buffers.
- Comparison
- The won's valuation discount is similar to INR and IDR, but Korea does not carry comparable balance-of-payments pressure.
- Risks
- Further USD strength, larger-than-expected foreign outflows, expansion of retail overseas investment, and KOSPI declines driven by worsening global risk appetite.
- KOSPIInfluences KRW through capital-flow and equity-strategy dynamics
- Strengths
- Strong 1H26 performance, with chip and AI demand supporting upward revisions in earnings expectations; the report remains broadly constructive on Korean equities.
- Weaknesses
- Gains are concentrated in chip stocks, and foreign investors may rebalance due to single-name, sector, or country position limits, making 2H26 likely more volatile.
- Comparison
- The report sets a KOSPI target of 9,000, with a greater weight on the bull scenario of 10,500 than the bear scenario of 6,500.
- Risks
- Short-term weakness in chip stocks, continued foreign investor selling, inability to sustain the slope of earnings revisions, and Korean retail money shifting back overseas.
- KTB rates and 2s10s curveMacro-rate backdrop
- Strengths
- Strong growth, inflation above target, BoK-rate-hike expectations, and a relatively weak won support higher yields.
- Weaknesses
- Yields have risen sharply and are near 2022 highs; this BoK hiking cycle may be shallower than prior cycles.
- Comparison
- The excess term premium model indicates the 2s10s curve is roughly at fair value.
- Risks
- Lower-than-expected BoK guidance, additional KTB issuance tied to 2027 fiscal budget expectations, and changes in U.S. term premiums.
- Korean semiconductors and export chainKey driver supporting Korea's fundamentals and KRW
- Strengths
- Record export growth driven by AI supercycle and improving memory dynamics, with domestic capex potentially increasing KRW demand through remittances.
- Weaknesses
- KOSPI incremental market value is highly concentrated in chip stocks, and position limits may trigger further foreign investor rebalancing sales.
- Comparison
- Semiconductor stocks rose more than 200% in 1H26, accounting for 79% of KOSPI market-value gains.
- Risks
- Memory price or demand weakening, changes in capital flows from U.S. listings or overseas investing, and continued foreign investor rebalancing.
Key data
- South Korea 2026 GDP growth forecast2.8%Projected by Morgan Stanley, with upside risk; above potential growth of about 1.8%.
- South Korea 1Q26 GDP3.8%Y / 1.8%QAbove the market consensus of 3.6%.
- South Korea 1H26 export growth47.7%YSupported by semiconductor demand and the AI supercycle.
- South Korea Jan–May 2026 current account surplusUS$141bnThe fastest surplus accumulation pace on record.
- South Korea 1H26 trade surplusUS$138bnCould imply a full-year outcome above US$200bn, more than double 2025.
- June exportsUS$102.3bnUp 70.9% year-on-year, at record highs.
- Increase in corporate onshore FX depositsUS$14bnAdded since the low point in Korea's trade balance in March 2025.
- March decline in corporate onshore FX depositsUS$13bnPartly related to foreign-currency sales for corporate tax payments.
- NPS expected full-year outflow~US$5bnAssuming rebalancing toward its 2026 allocation target.
- USD/KRW range view~1,490-1,560If there is no broader USD weakening, the pair may remain in this range; a break below about 1,485 could open more downside room.
- KOSPI 1H26 gain101%Chip stocks rose more than 200% in the same period, accounting for 79% of incremental market value.
- KOSPI target9,000Bull scenario 10,500, bear scenario 6,500.
Impact & implications
For asset allocation, the report signals improved medium-term risk-reward in the won, but capital-flow constraints should not be ignored. If exporters increase remittances, BoK delivers on rate hikes, and the USD weakens, KRW could appreciate moderately; if foreign investors continue reducing Korean equity exposure, Korean retail increases overseas investments, or USD remains strong, the downside space for USD/KRW will remain limited. For Korean equities, the semiconductor and AI cycles still offer fundamental support, but the 1H26 rally was highly concentrated, and 2H26 is more likely to bring volatility and rebalancing pressure. For Korea rates, strong growth, above-target inflation, high house prices, and a weak won support higher yields, but the curve valuation is already near fair value.
Risks
- Foreign investors continue to sell Korean stocks and outflows do not slow as expected.
- Korean retail investors increase offshore stock purchases after tax incentives decline or memory stocks weaken.
- Exporters continue to hold on to USD earnings and remittances do not rise with the stronger trade surplus.
- The USD strengthens further due to Fed expectations or shifts in global risk appetite, with KRW showing higher beta.
- The relationship between KOSPI and KRW changes more durably, so stock gains no longer consistently translate into KRW strength.
- The BoK path of rate hikes falls short of expectations, and the Korea-US rate differential does not narrow sufficiently.
- 2027 budget or KTB issuance expectations trigger renewed volatility in Korea sovereign yields.
What to watch
- Whether USD/KRW breaks below about 1,485 and moves out of the 1,490–1,560 range.
- Whether cash from major semiconductor firms' U.S. listings in July–August starts to be remitted back to Korea.
- Whether Korea's July corporate tax payments reduce corporate FX deposits and add KRW bid.
- Whether foreign investor net outflows from Korean stocks slow in 2H26.
- Whether Korean retail investors continue increasing overseas stock purchases after June and July.
- Whether BoK's July 16 meeting raises rates as expected and issues hawkish guidance.
- Whether Korean export growth, current account surplus, and semiconductor demand remain strong.
- Changes in NPS offshore allocation and strategic FX hedging ratios.