South Korea: Fiscal still boosting growth, but LPPL bubbles suggest tactical caution on equities

Early signs of fiscal stimulus and an uptick in growth leading indicators point to improving growth prospects. We re-iterate our bullish view on KRW, but bearish tactical signals leave us waiting for a better entry on equities.

The uptick in the South Korea’s fiscal impulse is the first sign that the fiscal package approved last month is already feeding through to the economy. More broadly, our growth LEI edged higher again last month, pointing to continued upside in growth.

The odds of another rate cut are much lower with improving  growth, a US-Korea trade agreement, and stubborn inflation pressures. This is corroborated by our central bank regime model, which has shifted from an “easing” to a “neutral” regime this month. Previously, BoK minutes cited the need for additional rate cuts after the July meeting’s pause given “significant” uncertainty from US tariffs.

Looser fiscal and tighter monetary policy (at the margin) is KRW bullish. The improving growth backdrop is also bullish equities, but the pace of the equity rally leaves it vulnerable to a sell-off. The diffusion index of LPPL climax signals has reliably signaled pullbacks, so we are waiting for a better entry point.