It's only a slight exaggeration to say that Seoul stocks equal Samsung.
Samsung Electronics SMSN makes up an enormous 27% of the MSCI Korea index and recently has accounted for an even larger share of stock gains. Now that the shares are wobbly, expect it to drive Seoul stocks down.
This is not the time for Korea or Taiwan tech. Samsung Electronics shares had a rip-roaring start to the year, up 23.8% from Jan. 4 through the end of that month. Overseas investors piled into Seoul stocks and their nearby neighbors in Taipei, both in terms of geography and industry.
Samsung's warning that it will disappoint on earnings has derailed that progress. Trading has been choppy since the start of February and investors should be looking for the stock to tread water at best. How far it is submerged remains to be seen.
The profit outlook doesn't look pretty. "The company expects the scope of price declines in main memory chip products to be larger than expected," Samsung said in an unprecedented filing ahead of its earnings.
How you can expect something to be worse than expected is hard to imagine. It reminds me of the moment in that BBC comedy classic Blackadder when the "baddie" warned that the hero would suffer a fate worse than a fate worse than death.
Whichever way you look at it, it's pretty bad.
Samsung shares actually held up pretty well on Wednesday in Asia. The stock dipped 2% right at the start of trade, but ended the day up 0.2% in Seoul.
But Samsung is more than a quarter of the Seoul market, and that's just the regular shares. Add in the preferred stock and it's 30.8%, so it's approaching one-third of the MSCI Korea.
Samsung consequently makes up just as much of any index fund that tracks it, such as the US$4.9 billion iShares MSCI South Korea ETF (EWY) . And that is the only game in Koreatown when it comes to pure-play, single-country ETFs; the next-largest, with only US$50.6 million in assets, is the leveraged, triple-your-money-or-losses Direxion Daily South Korea Bull 3x Shares fund (KORU) .
Triple your losses looks most likely at this point, which should cause Asia-focused investors to retreat.
At the start of this year, overseas investors piled into stocks in South Korea, with US$4.3 billion in inflows in the first two months of 2019, and in Taiwan, with US$4.4 billion. That was part of a total US$12 billion in inflows into Asia ex-Japan for the first quarter, offsetting net outflows of US$15 billion in the fourth quarter of 2018.
That optimism now looks misplaced thanks to the increasingly weak outlook for tech hardware. The reversal of sentiment has caused Société Générale's Asia equity strategy team to say they've turned "cautious" on South Korea and Taiwan. Earnings growth prospects look essentially flat for Taiwan and positively negative for Korea.
South Korea led the tech cycle up in 2016 and is leading it down now. Korean stocks are on track for a 15% decline in profits this year, SocGen figures, led by tech and banking, in contrast to gains of 4% for Asia ex-Japan as a whole. The "unfavorable macroeconomic factors and a bleak earnings picture have taken the sheen off the low equity valuations" in Seoul, the investment bank says.
Samsung last week already told shareholders that demand was soft for its core product, memory chips. No surprise. Prices for DRAM chips have fallen more than 20% in the first quarter, according to data from DRAMeXchange, which tracks memory-chip prices. For Samsung, flagging chip sales and greater inventories are backing up at the same time screen sales are slumping.
So the Samsung warning surely portends badly for peers such as SK Hynix (HXSCL) and U.S. rival Micron Technology (MU) . Both Korea and Taiwan are equally tech-dominated markets, with 41% of the MSCI Taiwan taken up by tech and 40% of the MSCI Korea. Shares in Taipei are on track for an earnings decline of 1.8% this year, SocGen says.
Samsung will give its actual earnings forecast next week. The situation would only get worse should the U.S. economy head into recession in 2020. And that's a prospect that markets are starting to indicate is on the cards.
Consider that Apple Inc. (AAPL) is not only Samsung's largest competitor on phones but also its largest customer for screens for those phones. Hynix is another major Apple supplier, as are both LG Display (LPL) and LG Innotek KS:011070 in Korea.
Taiwan Semiconductor Manufacturing Co. (TSM) , better known simply as TSMC, would be the biggest stock to avoid in Taiwan. But there's a host of other major tech suppliers listed in Taipei, the largest of those hardware makers being Foxconn, full name Hon Hai Precision Industry HHPD.
We'll wait to hear the fate worse than the fate worse than poor earnings next week. Samsung shares are likely to suffer, and its peers will surely suffer alongside it, too.