Investors are bracing for a triple whammy as South Korea’s political turmoil adds another layer of uncertainty for the country’s struggling assets.
Even before President Yoon Suk Yeol’s shock martial law announcement, the equity benchmark Kospi and the won were among the world’s worst performers, partly due to fears they would be major casualties of Donald Trump’s second term. That was on top of worries about slowing domestic growth, which last week led to a surprise rate cut from the Bank of Korea.
Now, with the opposition pushing to impeach Yoon and charge him with treason, investors likely face a prolonged leadership vacuum while the Constitutional Court deliberates.
The timing couldn’t be worse. Trump’s second term has raised concerns about the future of South Korea’s semiconductor and battery industries. The Kospi is down 7% this year, while the won has slumped about 9% against the US dollar, the most among Asian currencies.
“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 US$4.8 billion ($6.45 billion).
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Park said he’d wait to see the outcome of discussions on the stock stabilization fund and a possible additional rate cut by the central bank. “If there are such government support measures, the market will appear safe.”
Shortly after Yoon’s surprise martial law declaration, South Korea’s top financial authorities vowed to provide unlimited liquidity to support markets and said a 10 trillion won stock stabilisation fund is ready to be deployed if needed.
Bank of Korea Governor Rhee Chang-yong said it is unlikely the central bank will cut interest rates.
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The won rebounded to 1,413.50 per US dollar, paring initial losses that briefly pushed it to the weakest level since 2009. Strategists surveyed by Bloomberg predict it will likely trade at 1,410 per US dollar at end-March 2025.
Investors were already wary of South Korea before the recent political turmoil, citing the country’s slowing economy and concerns about Trump’s tariffs. This led to four-straight months of stock outflows totaling over US$14 billion, prompting Citigroup, Goldman Sachs Group and JPMorgan Chase & Co. to downgrade the nation’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 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.”
Given this year’s economic uncertainty, bond investors have fared better. Korean bonds have been among Asia’s top performers, luring US$42 billion in net inflows thanks to inclusion in a key FTSE debt index and the BOK’s surprise rate cut.
A gauge of won-denominated debt has returned 8.2% in 2024, outpacing the 2% advance in the broader emerging markets, data compiled by Bloomberg show.
Still, further gains are unlikely until the year-end, said Kiyong Seong, a macro strategist at Societe Generale in Hong Kong.
“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.
Charts: Bloomberg
