South Korean assets yesterday greeted the nation’s new president cautiously, with stocks, bonds and the currency falling as investors shifted focus to the challenges ahead.
The KOSPI dropped the most since March as North Korea’s reiteration of its pledge to push forward with another nuclear test showed that South Korean President Moon Jae-in, the victor in Tuesday’s vote, is unlikely to get a honeymoon.
While Citigroup Inc and Morgan Stanley are betting on further upside for South Korea’s record-setting stocks, analysts and investors are seeking more from Moon, who ran on a platform of corporate reform and rapprochement with North Korea.
While South Korean technology shares rallied on bets that Moon will bolster the sector in a bid to deliver more jobs, the KOSPI spiked lower, declining 1 percent — the most since March 3 — as utilities and banks paced losses.
Markets in South Korea have learned to shrug off a lot of the saber rattling by North Korea, but the entry of US President Donald Trump into the equation has raised the stakes. The US is deploying a missile defense system in South Korea, an initiative that has angered Pyongyang and its main ally, China.
The vote removes a lot of the political uncertainty associated with South Korea — former South Korean president Park Geun-hye was ousted amid a corruption probe in March — which should give the KOSPI’s rally more oxygen, according to analysts from Citigroup, Jefferies Group and Morgan Stanley.
“I wouldn’t be surprised to see a pullback in the market in the way that you buy a rumor, sell the news,” said Nader Naeimi, head of a dynamic investment fund at AMP Capital Investors in Sydney.
Companies expected to benefit from Moon’s win jumped yesterday, with Shinwon Corp shares climbing as much as 30 percent in Seoul. The clothing manufacturer has factories in the Kaesong industrial region, a joint economic venture between the two Koreas.
The KOSPI is ready to “blow off” now the election is done, said Sean Darby, chief global equity strategist in Hong Kong at Jefferies, which is modestly bullish on South Korea within its global asset allocation.
Neither “the economic uncertainty caused by the North Korean geopolitical tensions, nor the impeachment of former president Park Geun-hye has deterred investors,” Darby said in a note. “The combination of an improving export picture, sanguine inflation, a large current-account surplus to GDP and inexpensive valuations has tipped investors towards [South] Korean equities.”
The won retreated 0.4 percent from Monday’s close. While well off a nadir reached in December last year, the increase in North Korean tensions over the past two months has weighed on the currency.
Benchmark bonds continued their decline, with 10-year yields up 5 basis points to 2.3 percent, edging up toward a 15-month high reached in March.
Goldman Sachs Group Inc predicts two main policy outcomes from the election: tax hikes and improvement in corporate governance. Reforming South Korea’s chaebols — the family-run conglomerates that drove the nation’s post-Korean war recovery — is a major concern among foreign investors, who have long complained about their lack of transparency.
However, Moon, who on Wednesday said that close ties between the chaebols and the government would disappear, might face some push back in these efforts, Goldman Sachs senior Asia economist Goohoon Kwon said.
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