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South Korean stocks seen outperforming the won as tensions percolate

[HONG KONG] South Korea's stocks and currency have largely brushed off heightened tensions on the Korean peninsula this year: the Kospi index is up 15 per cent and the won has strengthened almost 7 per cent, even as Pyongyang tested a volley of missiles and a nuclear bomb.

Now they may go separate ways.

While solid earnings and recovering exports will offset concerns about North Korea's intentions and continue to underpin Kospi gains, it's a different story for the currency, says Jaejoon Woo, chief Korea economist at Bank of America Merrill Lynch in Hong Kong.

"North Korea concerns will continue to haunt the currency and with accelerated capital outflows and the trajectory of the Bank of Korea's rate decisions, the won will face more downside pressure," says Mr Woo, who sees the won falling more than two per cent from current levels by year-end.

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This will result in the gap between stocks and the currency widening further.

Analysts and traders, however, seem split on the won's outlook.

The currency, which traded around 1,135.15 per dollar on Wednesday, could slip to 1,140 by the end of 2017, according to the median of strategists' forecasts compiled by Bloomberg. The forwards market, meanwhile, sees it gaining to 1,130.

"The Kospi index doesn't represent the whole macro picture and is driven by exporters who are more reliant on the global economy," said Chung Chang Won, a Seoul-based analyst at Nomura Holdings, who expects the Korean benchmark to break 2,650 points this year and hit the 3,000 mark by the end of 2018.

"And their earnings are very good," he said.

BLOOMBERG