Even if the U.S. economy remains resilient, that doesn’t mean every economy in the world will be able to withstand the rise in oil prices.South Korea is a notable target. Michael Chung of Citi has already lowered his KOSPI target for mid-year 2011 to 2050-2150 (right now, it’s at 1996) as a result of Citi raising their crude price target to $105 for 2011. More worrying is that Chung predicts analysts will cut their earnings outlook for Korean firms by 6-7%.
Here’s a full Korean market outlook from Michael Chung of Citi (emphasis ours):
Our overall universe earnings would decrease by 4% if oil price rises by 10% from $90, but the impact would accelerate if oil prices go up by an additional 10%. Based on discussions with managements, we believe most major companies in Korea are able to deal with oil prices up to $100 but, beyond that, they start to suffer on margins, especially SMEs. By sector, utilities would be hurt the most, followed by chemical, auto, and construction. The only sector showing a positive impact would be insurance and shipbuilding (for future rig orders instead of immediate earnings).