By Fabiana Negrin Ochoa
The unexpected declaration of martial law in South Korea rattled markets, sending the won and equities lower. While the measure was promptly struck down by parliament, the episode is likely to leave a bad taste in investors' mouths.
President Yoon Suk Yeol declared martial law late Tuesday night, claiming that political opponents had made the country vulnerable to North Korea, but had to walk that back hours later as lawmakers voted down the measure early on Wednesday morning.
The won weakened sharply on the news but has since clawed back some ground and market nerves have been soothed a little, but the tumult raises uncomfortable questions around the political risk premium on Korean assets, said Vishnu Varathan, head of macro research Asia ex-Japan at Mizuho Securities.
"We're not get a complete restitution of the fundamentals--the risk premium isn't going to go away," he said.
South Korea, home to some of the world's most advanced chipmakers, has been in a sweet spot due to the semiconductor cycle upturn, but foreign investors' interest in Korean assets has been tempered somewhat by a confluence of factors, Varathan said.
Part of this is because Korea lags behind Taiwan in the artificial intelligence push, he said. That's been somewhat disappointing to investors.
Another is regulations like the U.S. Chips Act, a bid to bolster the U.S.'s semiconductor manufacturing capacity and cut reliance on China. That has put Korea in a tricky spot as a supplier of upstream goods--such as equipment related to chip manufacturing--to China, Varathan said. Concerns about corporate governance have also played a role.
That has led to chronically lower book to price valuations for Korean assets, and impeded foreign interest in the equities market, keeping like-for-like valuations low compared with its peers, he said.
Officials have been making efforts to counter that, including capital market reforms to expand global investment into the local government bond market, which led to Korean being included in the FTSE Russell World Government Bond Index.
But the martial law declaration will now make it harder to shake off the so-called "Korea discount," Varathan said. "There's a risk of this being a one step forward two steps back situation."
It's a setback that's going to raise doubts on multiple fronts, he expects, such as if fiscal consolidation will be delayed and what the impact will be on the Bank of Korea.
"We already had surprise rate cut [in October]," and now policymakers will be facing a tougher balancing act between providing stimulus for the economy and maintaining stability, particularly as the won wavers, he said.
Externally, the context of president-elect Donald Trump's return to the White House may complicate things further, he said.
Uncertainty around what tariffs the U.S. might impose is a big overhang for export-reliant economies like South Korea.
"None of this augurs well for Korean assets."
For now, the worst has been averted due to the fact that the martial law declaration was so promptly rejected, "but there's a lot of dust out there that needs to settle," he said. "There's a chance that Korean assets could underperform in the coming months until there's clarity on the domestic front and Trump 2.0."
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(END) Dow Jones Newswires
December 03, 2024 20:20 ET (01:20 GMT)
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