Political turmoil in Korea fuels market instability
South Korea’s markets have experienced bouts of extreme volatility after the country’s president Yoon Suk Yeol’s invoked martial law during a televised address last week. Even more confusing was how quickly the move was reversed following the public outcry and opposition from the National Assembly.
Although the martial law only lasted a few hours, the political ramifications have sparked mass protests, led to a travel ban on the president, and resulted in police raids.
The political crisis has also affected the economy, with the Korean won plummeting and its stock market experiencing extreme volatility.
The situation in South Korea remains highly fluid, and industry experts expect the won to further weaken against the US dollar due to anticipated US trade policies and also demand for American financial assets.
abrdn
“The political uncertainty will carry on especially if impeachment proceedings drag on or if President Yoon steps down quickly,” Alex Smith, head of equities investment specialists at abrdn told AsianInvestor.
“Investors may now attach a higher political risk premium to South Korea in the long term. The market reaction has been moderate and domestic buyers added to equities as valuations became more attractive, especially to exporters.”
ATTRACTIVE EQUITIES
In a flash report, Swiss banking group Lombard Odier expressed optimism for South Korean equities due to attractive valuations and their exposure to the technology sector.
However, the report remained wary of the political uncertainty and said that it the group will continue to monitor the country’s political situation before solidifying it’s market position.
Despite the fluidity of the situation, abrdn’s Smith believes that major operational disruptions for Korean businesses now seem unlikely.
“The immediate impact on financial markets may prove to be short-lived. However, the longer-term ramifications may persist via higher risk premia, in part because it puts Korea into the market spotlight at a time when investors are concerned that Korea may fall foul of Trump’s trade actions,” said Smith.
Economists from abrdn has also reported that South Korea is one of the more vulnerable economies to punitive trade actions from the incoming US administration.
In this context, multinational companies have adopted a defensive stance and may stand to benefit from a weaker won.
“At present, export-oriented holdings have held up better,” said Smith.
“The companies that have been most impacted by the developments are domestic businesses, but also those that have benefitted from Yoon’s policy agenda, which includes the value up program.”
Smith believes that the impact to earnings will be limited, and the political situation remains fluid.
“We are alive to the situation opening up to offer opportunities, as well as potential risks,” he said.