Daily Commentary

MarketMinder’s View: As trend-setting nations go, South Korea seems hard to beat. Take stocks. Budding pockets of euphoria (AI and Tech) in America are on full display in Korean markets. The benchmark Korea Composite Stock Price Index’s (KOSPI’s) “... spectacular ascent has morphed into one of the market’s most bewildering reversals. The KOSPI has plunged into a bear market, shedding a quarter of its value since late June, yet remains by far the world’s best-performing major equity market this year. The whipsaw highlights both the power and peril of South Korea’s AI-fuelled stock boom. Explosive earnings growth at semiconductor giants Samsung Electronics and SK Hynix continues to underpin the investment case. But a rally turbocharged by margin debt, concentrated in just two stocks and increasingly disconnected from the broader economy, has left regulators wary and investors exposed to violent swings.” (As ever, please note MarketMinder doesn’t make individual security recommendations—our interest is in the broader theme only.) For investors, we think Korea’s performance this year highlights two lessons for global investors. First: It underscores the importance of monitoring sentiment. As Sir John Templeton famously observed, “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Now, euphoria itself doesn’t cause a bear market. That is when expectations far exceed what reality can possibly deliver. As the article hints, “explosive earnings growth” helps fundamentally support stocks. But euphoria can make the market more fragile and prone to almost any disappointment that hits. Second, Korea’s hot performance reflects the movement of only two stocks that account for over half of the KOSPI—highlighting the issues with smaller stock markets. Just as a handful of highflyers aren’t all telling about the S&P 500, two hot stocks in Korea don’t signal unhinged optimism in global markets. They provide a window into what true euphoria may look like, but they don’t mean the global bull market is about to run out of wall of worry to climb.

MarketMinder’s View: This article shows why rising prices in some areas don’t automatically translate to others. The reason: substitution. (As it mentions specific companies’ practices, please note MarketMinder doesn’t make individual security recommendations.) “Edgar Dworsky, a consumer advocate ... says companies use two main tricks to mask price increases: shrinkflation (keeping the price the same but cutting the amount of product you get) and skimpflation (swapping out ingredients for cheaper alternatives). He says he’s seeing a lot more skimpflation lately, which is more likely to go unnoticed since consumers aren’t in the habit of memorizing nutrition labels.” Though many may bemoan widespread skimpflation, substitution highlights how, when prices rise, buyers don’t necessarily eat it or push it on to their customers—they look for alternatives, especially if they can’t pass on increased costs. Like the article observes, “Innovation is in the eye of the beholder ... One product manager’s money-saving hack may feel like sacrilege to a devoted brand loyalist. Reformulating a product is serious business, and companies often hire outside consultants to get it right.” If some items’ price increases cause businesses and consumers to switch to lower-price alternatives, the economic reality may actually be less inflation than perceived.

MarketMinder’s View: Oil prices are up since America’s ceasefire with Iran crumbled, but they remain nowhere near their April heights. This article helps show why: Anticipation is mitigation. “The oil market’s top players aren’t waiting around to see who winds up with control over the Strait of Hormuz—countries and companies are scrambling to bypass the waterway. ... Commodity analysts at Goldman Sachs looked at seven pipeline and export-infrastructure projects that are under construction, planned or considered potentially feasible. By the end of next year, that capacity—plus existing pipelines—could insulate more than 45% of the pre-war level of Persian Gulf producers’ exports from any potential future Hormuz shocks, they estimated in a note out Sunday night. By the end of 2028, the number rises to more than 60%.” Markets look 3 – 30 months out, and they are weighing how these producers are diversifying their distribution capacity. While these projects won’t change the supply picture overnight, they illustrate how businesses are acting now to ensure future supply, rendering attitudes otherwise today “overly apocalyptic.” As the conclusion here brings home: “Again and again in recent years, markets have proved far more resilient and dynamic in response to major shocks than analysts and economists had predicted.”