Temporary Turmoil Caused by South Korea's Martial Law

Event Summary:

• On the night of 3 December 2024, South Korean President Yoon Suk-yeol unexpectedly declared martial law, marking the first issuance of 'Order No. 1' in 44 years. Just six hours later, he delivered a live address from the presidential office, announcing the lifting of martial law and restoring normalcy in South Korea.

• The incident stemmed from political disagreements between the two parties. The Democratic Party has expressed dissatisfaction with Yoon Suk-yeol of the People Power Party serving as president, leading to multiple protests calling for his resignation. Today, Democratic Party lawmaker Lee Jae-myung announced that a vote on the president’s impeachment will take place on 6 or 7 December 2024.

• Many media outlets criticised martial law as a poor decision, prompting the largest local labour union to announce an indefinite strike to hold President Yoon accountable.

• Leaders of local financial institutions addressed the volatility of asset prices that evening, and stated the following morning that the country was prepared to deploy 100 trillion won from the market stabilisation fund to maintain investor confidence, if necessary.

• The Bank of Korea announced today that it will increase market repurchase operations to provide short-term liquidity.

Asset Performance: 

• The Seoul Composite Index fell by 2% at yesterday’s close, largely driven by the energy sector, with the Korea National Oil Corporation (KRX: 036460) dropping 18.6%. However, major components such as Samsung Electronics and SK Hynix posted gains. Today, the Seoul Composite Index reduced its decline to 1.44%, as the market absorbed the negative news from the previous day.

• During the martial law period, the U.S. ETF tracking the MSCI South Korea Index (NYSE: EWY) fell by as much as 7%, but prices rebounded as the market absorbed the news, ultimately closing down just 1.6%.

• The South Korean won weakened significantly, with the dollar reaching as high as 1,429 won. Following statements from several government officials, the market gradually stabilised, and the dollar is now trading at approximately 1,415 won.

• The yield on South Korea's 10-year government bonds fell to 2.725%, returning to levels last seen in March 2022.

Our Research Team's Perspectives: 

• Martial law has sparked turmoil in South Korea's financial markets, but we believe the impact will be short-term. Compared to previous martial law instances, such as in the 1970s, this event is relatively minor and does not mirror the Gwangju Uprising. The military's symbolic presence outside the National Assembly did not escalate into further action, and President Yoon refrained from large-scale repression or targeting opposition parties.

• Looking at South Korea's political culture and history, leadership changes by opposition parties have occurred before. Should Yoon Suk-yeol be impeached, we believe that any potential candidates are unlikely to significantly affect South Korea's economic and financial policies. While political maneuvering may take place before a new president takes office, any effects on the stock market are expected to be short-lived and limited.

• Regarding the performance of the South Korean stock market, the energy sector was the biggest laggard last night. However, we believe this decline was driven more by short-term sentiment than by weakening fundamentals. In fact, the energy sector stands to benefit from government policies. On 28 November 2024, the government announced an extension of tax relief for local energy companies to boost profitability. Additionally, the Korea Gas Corporation recently reported third-quarter profits that exceeded expectations, signaling continued improvement in its fundamentals. We believe that last night's market performance reflects excessive concerns about political instability impacting policy-driven sectors, leading to temporary panic selling.

• Changes in the political situation undoubtedly increase downside risks. However, regardless of party affiliation, the local government remains united in its goal to improve the price-to-book ratio of the South Korean stock market to boost performance. Currently, the Seoul Composite Index has a price-to-book ratio of 0.9x, which is in line with the median level of the past 20 years. Given the government's initiatives this year to enhance corporate value—particularly in the financial and automotive sectors, which have seen improved price-to-book ratios—we anticipate that the government will have ample fiscal resources to support local businesses in continuing to enhance their value. 

• Regarding the South Korean won, we expect it to continue weakening, though this is not primarily due to the current policy turmoil. The Bank of Korea's recent decision to lower interest rates by 0.25% reflects the latest inflation data, which has fallen below the 2% target. We believe the government will continue to cut rates next year to stimulate economic growth. Combined with short-term political factors that may impact foreign investor confidence, we anticipate further depreciation of the won. However, as South Korea is a major exporter of semiconductors, a weaker won could make local semiconductor exports more competitive, suggesting that a weak currency is not entirely negative.

• We currently maintain a 4-star "Very Attractive" rating for the South Korean stock market and will continue to assess corporate profitability and the impact of the political situation on the market for investors.

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The Research Team is part of iFAST Financial Pte Ltd.