South Korea’s currency recovered while its stocks fell yesterday, as investors braced for prolonged political uncertainties following a brief decree of martial law by South Korean President Yoon Suk-yeol.
The benchmark KOSPI closed 1.4 percent lower, while a gauge of equity volatility climbed by the most in three weeks. The won gained 1.2 percent to 1,410.56 per US dollar, erasing most of its overnight loss.
Yoon sparked chaos with the late Tuesday decree, sending the won and South Korea-related exchange-traded funds sharply lower overnight. The won has slumped about 9 percent against the US dollar this year, the worst performer among Asian currencies, while the KOSPI has dropped more than 7 percent.
Photo: Bloomberg
While extreme jitters dissipated as financial authorities swiftly vowed to provide “unlimited liquidity,” damage has been done to investor perception of South Korea’s financial markets.
It also poses a major setback for government efforts including the “Corporate Value-Up” program, which aims to erase the equity discount by making company boards more accountable to shareholders.
“This just adds to the disappointing track record for the government, and is not in line with the expectations investors have for a developed market,” Mirae Asset Global Investments Co chief investment officer An Joo-hee said in Hong Kong. “The latest drama is not going to help the [South] Korea market rerate when it’s already trading at steep discounts versus other Asian markets.”
The political turmoil does not bode well for the nation’s ongoing push for upgrades to developed market status in global indices. It is yet another blow to the stock market after Yoon’s administration shocked the global investment community with a sudden prohibition of short-selling about a year ago.
Efforts by the Yoon administration to reduce the “Korea Discount” — persistent undervaluation of the nation’s stocks — have had little impact. The KOSPI trades at about 0.8 times one-year forward estimated book value, while the MSCI World Index trades at 2.9 times, according to data compiled by Bloomberg.
South Korean Financial Services Commission Chairman Kim Byoung-hwan said after an emergency meeting that authorities would take “all possible measures” to ensure the stability of markets. A 10 trillion won (US$7 billion) stock market stabilization fund is ready to be deployed immediately if needed, he said.
The Bank of Korea’s (BOK) monetary board also announced steps to increase short-term liquidity and also pledged measures in the event of currency volatility.
BOK Governor Rhee Chang-yong said it is unlikely the central bank would cut interest rates as he played down the significance for the economy of the political chaos.
“This political event was very short-lived and I do not see any reason why we have to change our economic outlook at this moment,” Rhee said in an interview on Bloomberg TV yesterday. “I think we can focus on the economy’s strengths and the weaknesses of the economy rather than political side effects.”
Some traders were optimistic that a quick resolution to the standoff could bring a rebound.
“Markets will prefer a quick resolution to the stand-off and for political stability to return,” IG Asia Pte Ltd strategist Yeap Jun Rong (葉俊榮) said in Singapore.
Given Yoon’s low public ratings and difficulties enacting policies, “we may see some calm gradually return if more clarity were to be presented,” he added.
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