What are the market implications of Korea's latest political turmoil?
In what may be the shortest martial law ever, South Korean President Yoon declared emergency martial law close to midnight on 3rd December1 only for the National Assembly to over-ride his decision a few hours later.2
Korean stocks fell on the news and the local currency KRW initially weakened 3% against the dollar.3 Martial law hasn’t been in place in South Korea since 19804 and so the declaration came as an unwelcome surprise.
President Yoon initially explained the need for the martial law in order to protect the country from communist forces as relations between North Korea and South Korea have recently deteriorated.
However, it seems that Yoon’s actions were instead motivated by a response to domestic issues unrelated to North Korea. Specifically, Yoon has been frustrated by the opposition party’s impeachment of some key prosecutors as well as their rejection of his government budget proposal.
The opposition party gained more seats in parliament earlier this year, which has created a greater obstacle to Yoon’s achievement of his policy agenda.
Investment implications
The situation remains dynamic and evolving and markets could continue to experience volatility as the existing cabinet is likely to be reshuffled and a possible impeachment process could be evaluated.
There is little risk of any military action occurring because the public and even Yoon’s ruling party are against military intervention.
Still, we believe that this development will be a very short-term blip and is unlikely to have any lasting effects on the economy and financial markets.
More so, the Bank of Korea’s monetary policy board said it would hold an emergency meeting on Wednesday morning to help stabilize markets and provide “unlimited liquidity” if necessary.5
Thus we see any negative impact from this to be offset by proactive policy responses from the government and the central bank which of course should be positive for markets though the upside could be limited due to lingering uncertainties.
South Korean lawmakers have called for the impeachment of President Yoon. If we look back at the last time a Korean president was impeached - President Park, back in 2016, the Kospi index actually outperformed in 2016-2017 because of a robust global macro background driving demand for semiconductors.
This could demonstrate that Korean markets care more about the macro and semiconductor-cycle than domestic political disturbances.
With contribution from Kristina Hooper and Thomas Wu.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
