Investors are preparing for a triple whammy as political unrest in South Korea adds still another level of worry for the nation’s faltering assets.
Due in part to worries they will be significant casualties of Donald Trump’s second term, the stock benchmark Kospi and the won were among the worst performances worldwide even before President Yoon Suk Yeol‘s stunning martial law proclamation. That came on top of concerns over slowing down domestic economy, which last week resulted in a surprising Bank of Korea rate reduction.
Now, while the Constitutional Court deliberates, investors might find a protracted leadership void as the opposition pushes to impeach Yoon and charge him with treason.
There could not be a worse timing. The second term of Trump has sparked questions regarding the direction of South Korea’s semiconductor and battery sectors. This year the Kospi is down 7%; the won has dropped almost 9% against the dollar.
“Rather than buying the dip, we need to take a cautious approach,” said Park Jinho, head of equity investment at NH-Amundi Asset Management Co., which oversees about $4.8 billion. Park said he would wait to find out how talks on the stock stabilisation fund turned out as well as whether the central bank might drop another rate. “If there are such government support measures, the market will appear safe.”
Shortly after Yoon’s proclamation of surprise martial law, leading financial officials of South Korea promised to offer unlimited liquidity to help markets and stated a 10 trillion won stock stabilisation fund is ready to be used should need. Governor Rhee Chang-yong of Bank of Korea stated it is doubtful the central bank will lower interest rates.
Paring initial losses that momentarily drove it to the lowest level since 2009, the won rebounced to 1,414.50 per dollar. Strategists asked by Bloomberg project it will probably trade at 1,410 per dollar by end-March 2025.
Before the current political unrest, investors were already cautious about South Korea based on their weakening economy and worries about Trump’s tariffs. Four straight months of stock outflows totalling over $14 billion followed from this, which prompted Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. to downplay the country’s shares last month.
“I already have an underweight position on Korea in my Asian portfolios,” said Joohee An, chief investment officer at Mirae Asset Global Investments Co. in Hong Kong. “This event is not helpful for earnings growth or companies’ outlooks. Even though they are trading at discounts, I would prefer to invest in other countries where I see better earnings numbers.”
Bond buyers have done better considering the economic uncertainty of this year. Thanks to inclusion in a crucial FTSE debt index and the BOK’s unexpected rate decrease, Korean bonds have been among Asia’s best performers, drawing $42 billion in net inflows. Data gathered by Bloomberg indicates that a gauge of won-denominated debt has returned 8.2% in 2024, above the 2% rise in the wider emerging markets.
Still, Kiyong Seong, a macro strategist at Societe Generale SA in Hong Kong, said that more increases are doubtful until the year-end.
“Even though Korean bonds will be relatively insulated from the political chaos, it doesn’t mean complete isolation,” he said. Bond inflows may slow ahead of an increase in issuance next year, and there’s risk of a supplementary budget, he added.
