🚨 Analysis of Global Market Decoupling and Korean Stock Market Outlook

Today Korean Economic News | 2025.03.14

📌 U.S. Markets 'Stumble' While Europe 'Smiles'... Will Korea Decouple Too?

💬 As U.S. markets have plunged since the beginning of the year, European and Asian markets are showing upward trends, indicating a decoupling phenomenon from the U.S. The Korean stock market is also showing an upward trend, but it's uncertain whether it will move in a completely different direction from the U.S.

1️⃣ Easy to Understand

Until now, global markets have tended to rise when the U.S. market rises and fall when the U.S. falls. However, recently, a 'decoupling' phenomenon is occurring where European and Asian markets are rising even as the U.S. market falls. I'll explain why this phenomenon is occurring and what might happen to the Korean stock market in easy-to-understand terms.

Decoupling refers to a phenomenon where things that were originally connected start moving in different directions. In global markets, decoupling means that each country's market shows independent movement away from the influence of the U.S. market.

Since the beginning of the year, the U.S. S&P500 index has fallen by about 6%, but the European Stoxx600 index has risen by 4%, and Japan's Nikkei225 index has also risen by more than 5%. The Korean KOSPI has also maintained a slight upward trend, unlike the U.S. This phenomenon where U.S. and other regional markets move in different directions is called 'decoupling'.

Why is this phenomenon occurring? First, it's because the economic situations and outlooks for each region are changing. While the U.S. faces concerns about economic slowdown due to high inflation and tight monetary policy, Europe's economic recovery outlook is improving due to expectations of Russia-Ukraine peace negotiations. The Asian region is strengthening its growth momentum through China's economic stimulus measures and technological innovations (e.g., DeepSeek AI technology).

Second, changes in investors' asset allocation strategies are also having an impact. While the U.S. market has risen significantly over the past few years, making valuations (corporate value assessments) high, European and Asian markets are relatively undervalued, increasing their investment appeal. As a result, global investment funds are shifting from the U.S. to other regions.

Can the Korean stock market also participate in this decoupling trend? Korea has many industries with global competitiveness such as semiconductors, batteries, and automobiles, and its valuations are relatively low, making it attractive for investment. It is also seeking new opportunities while maintaining balance with both sides amid U.S.-China tensions. However, the Korean economy is highly dependent on exports, making it sensitive to the global trade environment and major countries' economic fluctuations. Therefore, rather than complete decoupling, a 'partial decoupling' where U.S. influence is somewhat reduced seems to be a more realistic scenario. Looking ahead, the Korean stock market is expected to move in response to various factors including global trends, domestic economic fundamentals, corporate performance, and government policies.

2️⃣ Economic Terms

📕 Decoupling

Decoupling refers to the phenomenon where markets or economies that were closely synchronized begin to move in different directions.

• It's a phenomenon where the interdependence between countries, heightened due to globalization, weakens and independent movements strengthen.
• It can occur due to various factors such as economic structure, policy direction, and geopolitical factors.

📕 Stock Market

The stock market is where corporate stocks are traded, reflecting each country's economic conditions and investment sentiment.

• It is influenced by individual countries' economic fundamentals, monetary policy, and corporate performance.
• The level of synchronization between countries can vary depending on global fund flows and the proportion of foreign investors.

📕 Geopolitical Risk

Geopolitical risk refers to risk factors affecting economies and markets due to conflicts between countries or political instability.

• It can appear in various forms such as wars, trade disputes, and resource conflicts.
• The Russia-Ukraine war and U.S.-China tensions are currently acting as major geopolitical risks.

📕 Asset Allocation

Asset allocation is an investment strategy that manages risk by diversifying investments across various asset classes.

• Risk can be reduced by diversifying investments by region, industry, and asset type, mitigating the impact of specific market fluctuations.
• Investors' asset allocation strategies are continuously adjusted according to changes in the global market environment.

3️⃣ Principles and Economic Outlook

💡 Causes of Global Market Decoupling and Structural Changes

• The decoupling phenomenon appearing in global markets is not a simple temporary fluctuation but an important signal reflecting structural changes in the world economy.

  • First, differences in economic recovery speed and monetary policy direction are the core drivers of decoupling. The U.S. is facing increasing concerns about economic slowdown due to the Fed's strong tightening policy in response to high inflation. Despite the interest rate cut cycle that began in 2024, inflation concerns still remain, making the economic recovery outlook uncertain. In contrast, Europe's economic outlook is improving due to energy price stabilization and expectations for Russia-Ukraine peace negotiations. If peace negotiations progress, the biggest uncertainty for the European economy could be resolved, resulting in significantly improved investment sentiment. The Asian region is strengthening its growth momentum through China's economic stimulus measures and expectations for Japan's escape from deflation. These regionally varying economic situations and policy directions are leading to the decoupling of markets.

  • Second, changes in industrial structure and corporate competitiveness are also notable factors. Over the past decade, the U.S. market has been led by big tech companies like Apple, Google, and Microsoft, but concerns about these companies' growth potential have been increasing recently. In particular, AI technology developments such as China's DeepSeek are threatening the technological superiority of U.S. companies. DeepSeek is evaluated to provide similar performance at a lower cost compared to major U.S. AI technologies, contributing to strengthening the competitiveness of Asian regional technology companies. Europe maintains competitiveness in fields such as eco-friendly energy, luxury consumer goods, and pharmaceuticals, and is establishing a long-term growth foundation by leading sustainability-related regulations. These changes in industry-specific competitive landscapes are bringing differentiation in regional market performance.

  • Third, valuation gaps and changes in investment fund flows are accelerating decoupling. The U.S. market has reached a much higher level of price-earnings ratio (PER) than other regions due to significant rises over the past decade. The S&P500's PER is about 22 times, considerably higher than the European Stoxx600's 15 times and the Korean KOSPI's 12 times. This valuation gap has become a factor making investors look for relatively undervalued markets. In fact, since the beginning of 2025, global fund money has been clearly flowing out of the U.S. and into European and Asian markets. This reflects a change in investment psychology preferring undervalued markets from a 'value investing' perspective.

  • Fourth, geopolitical risks and global supply chain reorganization are also important structural changes. Geopolitical conflicts such as U.S.-China tensions and the Russia-Ukraine war are accelerating the reorganization of global supply chains. As the movement to build supply chains centered around allied countries, called 'friendshoring', strengthens, economic linkages within each regional block are becoming closer, while economic decoupling between blocks is deepening. Asian countries such as Korea, Japan, and Taiwan are in a complex position, connected to the U.S. block in advanced technology fields and to the China block in raw materials and intermediate goods fields, making it important to maintain a balanced relationship with both sides. These geopolitical changes are becoming factors strengthening the independent movement of each country's market.

• As these complex factors work together, global market decoupling is likely to establish itself as a medium to long-term trend beyond a short-term phenomenon. This reflects structural changes in the global economy such as the retreat of globalization, regionalization, changes in industrial structure, and strengthening of each country's independent economic policies. Investors need to seek new investment strategies to adapt to these changes.

💡 Korean Stock Market's Decoupling Possibility and Determining Factors

• Let's examine whether the Korean stock market can successfully decouple from the U.S. and what the determining factors are.

  • First, the structural characteristics of the Korean economy will be the most important determining factor for decoupling. Korea has an export-dependent economic structure with exports accounting for about 40% of GDP. This means it can't help but react sensitively to the global trade environment and major countries' economic fluctuations. In particular, the U.S. and China are Korea's first and second largest export destinations, meaning their economic situations directly affect Korean corporate performance. However, recently, the Korean economy has been increasing its resilience to external shocks through expanding domestic demand proportion, diversifying industrial structure, and pioneering new markets. These changes in economic structure may enable some degree of independent movement in the Korean stock market.

  • Second, Korean companies' global competitiveness and innovation capabilities will be key variables. Korea has many industries with global competitiveness such as semiconductors, batteries, displays, and automobiles. In particular, innovation and investment in future growth industries such as eco-friendly technology, digital transformation, and bio are actively taking place recently. Samsung Electronics, SK Hynix, and other memory semiconductor companies are expected to benefit from increased AI demand, while Hyundai Motors and LG Energy Solution are taking important positions in the eco-friendly mobility transition. Competitiveness is also increasing in new areas such as new drug development and content. The stronger these companies' competitiveness becomes, the higher the possibility of forming an independent upward momentum in the Korean stock market.

  • Third, geopolitical position and diplomatic balance strategy will play an important role. Korea is in a complex position having to maintain close relationships with both the U.S. and China amid their conflict. The structure of depending heavily on the U.S. for security and China for the economy makes this situation even more difficult. However, this position can paradoxically become an opportunity. As one of the few countries that can access both U.S. and Chinese markets, it can play an important role in the process of global supply chain reorganization. The Korean government's balanced diplomatic strategy and companies' risk management capabilities will be important factors in capturing opportunities in this complex situation.

  • Fourth, the domestic policy environment and corporate governance improvement are also important factors for decoupling. Recently, the Korean government has been supporting corporate competitiveness enhancement and investment attraction through regulatory relaxation, business-friendly policies, and capital market activation. Also, improvements in corporate governance, expansion of shareholder returns, and strengthening of ESG management are factors increasing investment appeal. These changes in policy environment and corporate culture can improve foreign investors' perception of the Korean market and promote the inflow of global funds. This can be an important internal factor enabling decoupling from the U.S. market.

  • Fifth, valuation appeal and investor composition are also important variables. The Korean stock market remains at low levels of valuation indicators such as PER and PBR among major global markets. KOSPI's PER is about 12 times, significantly lower than the U.S. (22 times), Europe (15 times), and Japan (18 times). This undervalued state can be perceived as an attractive investment opportunity by global investors. Also, the proportion of foreign investors in the Korean stock market is relatively high (about 30%), making it susceptible to changes in global investment fund flows. The recent continuous net buying trend of foreign investors suggests that global investment sentiment toward the Korean market is improving.

• Considering these factors, it seems more realistic for the Korean stock market to achieve 'partial decoupling' rather than complete decoupling from the U.S. market. That is, the influence of the U.S. market still exists, but it's likely to change in a direction where its degree weakens and factors unique to the Korean market become more important. This will vary depending on various variables such as the competitiveness of the Korean economy and companies, policy environment, and geopolitical situation.

💡 Changes in Global Investment Environment and Investment Strategy Implications

• The global market decoupling phenomenon provides investors with both new opportunities and challenges, requiring adjustments to investment strategies accordingly.

  • First, the importance of regional and country diversification has increased. In the past, when global markets were synchronized, regional diversification provided only limited diversification effects. However, as decoupling strengthens, each regional and country market is showing independent flows, increasing the effect of diversified investment. Investors can reduce the risk of decline in a specific market and increase the stability of their overall portfolio by investing evenly in various regions such as the U.S., Europe, and Asia. In particular, it's also worth considering appropriately increasing the proportion of emerging markets.

  • Second, industry-specific and theme-specific selective investment has become the key to performance differentiation. Industry-specific performance differences are growing due to changes in global economic structure and geopolitical factors. Selective investment in future growth industries such as eco-friendly energy, AI, bio, advanced manufacturing, and cyber security has become important. In particular, innovative technologies like China's DeepSeek are rapidly changing the existing industrial order, requiring careful identification and response to technology trends. Also, interest in European defense, energy, and infrastructure-related industries, which are expected to benefit the most if Russia-Ukraine peace negotiations progress, may increase.

  • Third, geopolitical risk management and understanding of supply chain changes have become major factors for investment success. Various geopolitical risks such as U.S.-China tensions, the Russia-Ukraine war, and Middle East conflicts are affecting the market. Investors need to closely monitor changes in these risks and their impacts. In particular, attention to countries and companies that can benefit from the global supply chain reorganization process (emerging manufacturing hub countries like Vietnam, India, Mexico) is necessary. Also, a flexible asset allocation strategy to prepare for rapid market fluctuations that geopolitical tension easing (e.g., progress in peace negotiations) could trigger is important.

  • Fourth, a balance between tactical responses to short-term volatility and strategic approaches based on long-term trends is needed. As decoupling strengthens, short-term market volatility is also increasing. This raises the importance of tactical responses for capturing short-term opportunities. However, at the same time, strategic investment approaches based on long-term trends such as structural changes in the global economy, technological innovation, and demographic changes remain important. A balanced harmony between these two approaches will be key to a successful investment strategy.

  • Fifth, for Korean investors, harmonizing an understanding of the domestic market's differentiation factors with a global perspective is important. Considering the possibility of partial decoupling of the Korean stock market, it's necessary to pay attention to factors driving the unique movement of the domestic market (semiconductor industry recovery, export increase, corporate governance improvement, etc.). At the same time, the impact of global market environment changes on the Korean market should not be overlooked. In particular, the ripple effects of U.S. monetary policy, China's economic stimulus measures, and geopolitical risk changes on the Korean stock market should be continuously monitored.

• As such, global market decoupling is requiring investors to shift to a new paradigm. The past approach that 'analyzing the U.S. market well is enough' is no longer valid, and a differentiated investment strategy based on understanding the unique characteristics and movements of each region and country is needed. This requires more analysis and understanding from investors, but it is also a change that provides more diverse investment opportunities.

4️⃣ In Conclusion

The global market decoupling phenomenon is an important signal reflecting structural changes in the world economy. The phenomenon of European and Asian markets rising while the U.S. market falls can be seen as a result of deep economic structural changes and geopolitical reorganization, not just a simple temporary fluctuation.

This decoupling stems from complex factors including differences in each region's economic situation and policy direction, changes in industrial structure and corporate competitiveness, valuation gaps and changes in investment fund flows, and geopolitical risks and global supply chain reorganization. In particular, expectations for Russia-Ukraine peace negotiations are providing positive momentum to the European market, and innovative technologies such as China's DeepSeek are becoming factors strengthening the competitiveness of Asian technology companies.

The Korean stock market is seeking its own path amid this global decoupling trend. While Korea is highly sensitive to the global trade environment due to its high export dependence, its industrial base with global competitiveness in semiconductors, batteries, automobiles, etc., and relatively low valuation are acting as strengths. Also, its strategic position seeking new opportunities while maintaining balance with both sides amid U.S.-China tensions is a positive factor.

However, the possibility of the Korean stock market completely decoupling from the U.S. is limited, and 'partial decoupling' seems to be a more realistic scenario. It is expected to change in a direction where the influence of the U.S. market still exists but its degree weakens and factors unique to the Korean market become more important.

Investors need to seek new investment strategies in this era of decoupling. The importance of regional and country diversification has increased, and industry-specific and theme-specific selective investment has become the key to performance differentiation. Also, geopolitical risk management and understanding of supply chain changes have become major factors for investment success.

In conclusion, global market decoupling is a challenge for investors but also an opportunity. More diverse opportunities will open up for investors who understand the unique characteristics and movements of each region and country and establish differentiated investment strategies based on this. Korean markets and companies can also strengthen their independent competitiveness amid these changes and capture new growth opportunities in the process of global economic structure reorganization.