- The South Korean president’s surprise declaration of martial law caught investors off guard before parliament forced its reversal.
- With calm restored, opposition parties have moved to impeach the president.
- The Korean stock market is down slightly today – we are closely monitoring the situation and our Korean holdings as well as any potential investment opportunities created by market volatility.
On Tuesday, South Korea averted a political crisis when President Yoon Suk Yeol reversed his imposition of martial law following its unanimous blocking by parliament. He had earlier claimed it was necessary to protect freedom and lessen the influence of North Korean supporters.
The declaration of military rule, Korea’s first since introducing democracy in 1987, has surprised international observers and investors – the Korean stock market fell 1.4%. Despite thousands of people protesting outside parliament in Seoul, the demonstrations thankfully passed off peacefully and troops withdrew following its lifting.
After gaining power in 2022 by a margin of less than 1%, Yoon lost parliamentary elections earlier this year. His conservative People Power Party (PPP) took only 108 seats in April while the Democratic Party-led opposition increased its representation to 192 in the 300-seat National Assembly. His popularity recently fell even further following a corruption scandal involving his wife, with a poll at the end of November putting his approval rating at only 19%.
Last week the Democratic Party voted to cut almost $3bn from Yoon’s proposed 2025 budget, a move seen as an attempt to rein in his presidency that put parliament into deadlock at a time when Korea’s economy is slowing. Opposition parties have now submitted an impeachment motion against President Yoon with a vote expected in parliament on Friday or Saturday.
Market reaction
The events have caused the Korean won to weaken with the currency falling around 1% against the US dollar. The KOSPI, Korea’s stock exchange, is down 1.4% with the Financials sector hit hardest – the KOSPI 200 Financials Index is around 4% lower.
Korea makes up just under 10% of the MSCI Emerging Markets index. The Korean market has had a disappointing 2024 and is down around 7% year-to-date, although our funds’ Korean holdings have largely been profitable in 2024, including following the recent market fall[1].
Among our funds, SKAGEN Kon-Tiki has the largest Korean exposure with 24% of the portfolio invested across 11 holdings. Fredrik Bjelland, the fund’s Lead Manager, commented: “Korea’s market risk has clearly increased on the basis of these events, which will likely mean an increased risk premium for Korean shares in the short-term. While the situation appears to have stabilised, long-term it will likely extend the so-called 'Korea discount' which the authorities are trying to narrow.”
Across SKAGEN’s other funds, Focus has eight Korean holdings making up 20% of its portfolio, Vekst has six holdings representing 12% of the fund and Global has 2% of its portfolio invested in one Korean holding. SKAGEN m2 has no direct Korean exposure.
The portfolio teams will continue to assess the situation and any impact on our Korean holdings, as well as potential investment opportunities. “As with all periods of market turmoil, we believe the situation in Korea can also lead to new opportunities, even if in the short-term it means higher volatility,” explains Bjelland. “We have seen on previous occasions that the best companies can emerge stronger from periods of uncertainty and lay the foundations for good future returns.”
All information as at 30/11/24 unless stated.
[1] KOPSI as at 04/12/2024.