Can South Korean stocks sustain their gains?

SeongJoon Cho | Bloomberg | Getty Images

South Korean stocks are one of Asia's best performers so far this week but just how long can the market maintain its apparent resilience amid global volatility?

Experts say there are a number of factor to watch for the answer—China, the Federal Reserve, North Korea, local buyers and smartphone sales are chief among them—with the outcome not yet clear.

As of Friday's market close, the benchmark Kospi was 3.3 percent higher for the week after losing more than 8 percent in the first three weeks of August. The gains put the index well ahead of regional peers like Japan, China, Hong Kong and Australia.

"After a really sharp selloff, it's not surprising to see a rebound but whether sentiment returns on a more sustainable basis depends on China's recovery and capital outflows ahead of a U.S. rate hike," remarked Audrey Goh, senior investment strategist at Standard Chartered.

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Beijing is Seoul's largest trading partner so the former's stock market rout, slowing growth and recent currency devaluation impact Korea, a fellow export-oriented economy. Meanwhile, data earlier this month showed outflows of foreign capital from Korean stocks and bonds rose to a four-year high in July, reflecting concerns about an estimated sovereign debt burden of 35 percent of GDP and a quarterly economic growth rate that lags even bankrupt Greece.

South Korea's Financial Services Commission dismissed the recent outflows this week, saying the levels weren't "alarming."

Behind the Kospi's resiliency

Aside from China's monetary stimulus—Beijing cut interest rates and its required reserve ratio for banks on Tuesday—and dovish remarks from New York Federal Reserve president William Dudley on Wednesday, gains in Korea's market this week were also fueled by domestic developments.

"National pension funds have been buying for three consecutive days, so that's helped prop stocks up," Jiun Kim, equity strategist at Shinhan Investment Corporation told CNBC. "Valuations are now at historically low levels so the market looks good from that point of view."

The Kospi's price-to-book ratio now stands at 11.6, lower than the Shanghai Composite's reading of 15, according to Reuters. The benchmark Chinese index is seen as one of Asia's cheapest markets thanks to a severe stock rout that started in mid-June.

Moreover, a closely-watched agreement on Tuesday between Pyongyang and Seoul to de-escalate military tensions on Tuesday also lifted sentiment, Citigroup's chief Korea economist Jaechul Chang said in a note. Last week both Koreas exchanged artillery fire across their Western border, pushing the volatility index of the Kospi 200, an index of 200 blue-chip shares listed on Seoul, close to a one-year high.

Clouds approaching

In the past, a weaker currency has boosted the tech-heavy Kospi but even if expectations of a lower won come to fruition, that won't be sufficient to boost the stock market, Goh noted.

Strategists like Chang believe the Korean currency is headed for more depreciation should the renminbi (RMB) weaken further given Seoul's high trade dependency on China. Citigroup expects the won to hit 1,250 per dollar over the next three months from its current 1,172 level.

The Kospi could be hit by lagging chip, component and phone makers that make up the bulk of the tech exporters due to slower global smartphone growth, Goh explained.

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Heavy foreign selling may also be a tell-tale sign of further market gloom to come. Offshore equity investors were net sellers for a 16th straight session on Wednesday, the longest streak since 2012, Reuters reported,

Meanwhile, a downgrade by Goldman Sachs was also proof of bearish sentiment. The investment bank changed its view of Asia's fourth largest economy from overweight to market-weight in a report this week, citing the market's high cyclical exposure.