Asia Pacific Equity Strategy:MSCI Korea up 26%YTD.Rally sustainable

Still the most undervalued market. Figure 1 highlights that MSCI Korea has risen by 25.6% YTD in USD, outperforming Asia Pacific ex Japan by nearly 10%. While we certainly acknowledge the risks of a tactical correction, Figure 2 highlights that Korea still trades at a 28% discount to the region. While Korea has always been undervalued on our P/B vs ROE valuation model, the current discount is almost twice its five-year historical average discount of 13.4%. Significantly, the key reason for the discount remaining large is that while P/B has risen from a recent low of 0.93x in November 2016 to 1.11x currently, its ROE has risen from 9.2% to 10.2% over this period (see Figure 3).

    Still has the biggest upgrades to 2017E Consensus EPS. Korea continues to lead the upgrades to 2017E Consensus EPS with a further 2.7% upgrade in May. 2017E EPS growth now stands at 37%. More importantly, breadth continues to improve, with seven of the nine sectors associated with upgrades to 2017E Consensus EPS in May.

    Reiterate Overweight on Korea. Korea and Taiwan remain our biggest Overweight markets with smaller Overweights in MSCI China, MSCI Hong Kong and Singapore. Our biggest Underweights remain Australia, India and ASEAN except Singapore (Neutral on Thailand after our recent upgrade).