South Korea's Martial Law Whirlwind Jolts Markets

Published Dec 4, 2024, 2:27 AM

Featuring:

Rory Green, Chief China Economist - Head of Asia Research at TS Lombard

Elfreda Jonker, Alphinity Investment Management Client Portfolio Manager

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Welcome to the Daybreak Asia podcast. I'm Charlie Palotin for Doug Crismer. This week, South Korean President Yun suk Yo declared surprise martial law and then reversed it hours after the country's parliament voted to block it.

I will accept the parliament's request and lift marshal law through a cabinet meeting. However, although I immediately convened a cabinet meeting, the quorum for resolution has not been met due to the early hour, so I will lift it as soon as the quorum is reached.

Now. The surprise move led South Korean stocks to open lower following the overnight political turmoil, and for more, we heard from Rory Green, chief China economist and head of Asia Research at TS Lombard. He spoke with Bloomberg, Scherryon and Heidi Stroud Watts.

When it comes to how you use this and how markets potentially views this, is this sort of a well win sort of whipplash, one time jolt of volatility or does it suggest that elevator volatility is something we need to be careful of going forward?

Yeah, I think we need to be ready Hidi for a period of extended volatility, with particularly the one likely to be under pressure. I mean, already we have the Trump factor and the China trade competition, some idiosyncratic career Trump risk through the IRA which has been a massive beneficiary for Korean companies, and then the domestic economy week and the Bok on a rate cutting cycle. So the one, I think it is in for a tough time for at least a few weeks, while we see the domestic political situation start to stabilize and perhaps move towards this impeachment which I think is quite likely, and eventually some clarity on the future of President.

Un Well, you know, as you sort of characterize it, this might just be the spark of a cycle of political uncertainty you read, with a potential impeachment then leading of course to another election and perhaps changes within that government as well. How critical is it for confidence to be maintained here, given as Jerry mentioned, how externally vulnerable the South Korelina economy is, but also how you know, systemically key it is at a time when trade engines are almost guaranteed going to next year.

Yeah, absolutely critical node within the globe of economy. Notably that the semiconductor side, sk Hinex Samsung key providers of AI related memory chips, which is very important at this stage of the cycle. But you know, right down the value chain through the steel ships career is a key part of the global manufacturing cycle. So it's absolutely crucial for stability to be maintained, and not only for the manufacturing side, but also geopolitically with of course North Korea, China, Russia and the spillovers potentially from North Korean troops in Ukraine still as yet unknown for what it means within the wider age of context. So it's political stability for Korea absolutely.

Crucial, and it just comes to show how much these political tussles can impact financial markets, right. I mean, we have seen this swift move when it comes to Korea related assets overnight, and we're also watching a similar sort of collapse of government potentially unfold in France. We have a no confidence fault there. The Philippines also struggling with its only issues when it comes to political violence as well. How closely are you watching all of these political wranglings around the world and how big of a threat are they going into twenty twenty five, when we're seeing more real assaults on the democracy in a way, especially when you have a more Vallett l Trump administration also coming in.

Absolutely, and this is a critical factor that some of the markets find very hard to price.

Political risk is in many cases binary.

It's very difficult to price until it becomes in your face, as it has done today in the career situation. Clearly now with the inflation high, there is a very strong anti incumbency bias globally. We've seen this in a number of elections and that that is going to persist well into the twenty twenty five I think Korea could see a relatively quick resolution are compared to say, some of the European issues that you mentioned Chryanne. So it's definitely a key factor globally and not at least within China, where these issues are less visible from a protest and a vote standpoint, but perhaps a more important factor in the policy makers a reaction function. You can track the number of protests there, and this is one of the factors we think that is pushing China towards an outside fiscal response in twenty twenty five. So very important for global markets across the world, particularly in Asia, with China and Korea the top of our list.

Here we're looking at the I shares MSCI, South Korea ETF trading in Australia right now, when we're seeing the lowest numbers levels in a few weeks already, What will be the key transmission mechanism and the fastest to unfold given these political risks geopolitical risks around the world. Rory, will it be through the currency mechanism? And how much more difficult does that make the jobs of the central banks around the world.

Yeah, I think it is mainly the currency and it does pose a really challenging situation for these central banks.

If we take the bok and I've no Eu.

Chang Yong, for instance, the one already becoming a bit of a political issue before today's incidents, the one under pressure from domestic macro standpoint, higher rates, hitting property, hitting consumption through variable mortgages, the Trump tariff factor as I touched on, and then also this structural push through the NPS, the National Pension Fund of career reallocating in quite a significant way away from domestic assets to foreign assets, the structural drive to one depreciation, so that the Bok was already in a very difficult position managing the one trying to prop up the domestic economy, and that's been complicated to say the least by today's events. So the currency clearly an issue for the Bok. I think this puts them on course for probably another cut, maybe in early January, as they try to key to regenerate a bit of momentum back into the economy. China to similar issues with a political directive to maintain a strong R and B which is directed at odds with the monetary policy needed to support growth within the economy and to counteract potential Trump tariffs.

So within the region, the currency.

Dynamics at counter or countercurrens to the politics and that is going to be a key dynamic to watch through twenty twenty five.

So many cross currents for potential risk and volatility Internet year. Rory, We really appreciate you joining us later as it is for you. Rory Green from Global Data TS Lombard.

There, welcome back to the Daybreak Asia podcast. I'm Charlie Palette. Doug Chrisner has the week off. Stocks in Asia declined after self career's political turmoil, triggered by a brief imposition of martial law caught global investors off guard. For a macro outlook, we heard from Alfred er Junker, Alfinity Investment Management client portfolio manager, and she spoke with Bloomberg Sharry On and Heidi Stroud Whites.

This, of course at a time we're also seeing a politic book called Upheaval in France to a degree in Germany as well. What is the sort of best prison for investors to be looking at this?

Yes, I think we have been dealing with a lot of geo political risks over the last year already with the Middle East and Ukraine, Russia and now this. I think basically what it means for investors is just more volatility, more uncertainty, and something that you need to bear in mind when you look at investments to say how much of these sort of broader risks impact the companies that I invest in and should I adjust the valuation that I'm willing to pay for it or willing to keep it until a certain point. But so far it's been interesting. We haven't actually seen the markets reacting very aggressively to this. It's probably still early days for both.

Should visitors stare ourselves for potentially a longer term new normal of politic concidenty, particularly as we know next year when it comes to US foreign policy, trade policy, fiscal policy, it could all be quite different.

Yes, I think that probably is one of the biggest risks for next year in our view, is that we've already seen the Trump trade happening, So the market's pricing in a lot of sort of blue sky, we believe at this point in time, with tax cuts, obviously Tarr's still coming through, there's a lot of uncertainty. We don't know how it's going to play out. So what Trump was saying, it's really just the starting point of his negotiations. So I think throughout the whole year and probably throughout the next four years, we will have to deal with a lot of Trump uh, a lot of commentary from him and changing his mind potentially through throughout as well.

Given the external risks with the Trump trained, the potential tariffs, given the risks coming from the FED easing next year, how would you assess South Korean assets today? As we might see the impeachment proceedings of President Junisagyon unfold. If the opposition actually pushes this through.

Yes, I think these sort of things can definitely have a recal effect through the broader sort of Asian economies and the world economies. It is at this point in time probably the thirteenth largest economy in the world, so it's not small. It will definitely, I think, cause a lot of sort of pause for concern to say, how will this evolve? I think if you look back at South Korea and the history of the previous sort of presidents, they have a history of a lot of uncertainty and political upheaval as well. I think from an investors point of view and our exposure specifically, we don't currently have any positions directly in South Korea, but if you think about the semiconductor supply chain, companies like Eskahinis and Samsung do account for the majority of high bandwidth memory, so that is something we need to bear in mind. If you think about bigger investments like an Nvidia and also the broader semi conductor supply chain, where will you be impacted? I think at this point in time it's really just too early to tell if this will have a bigger impact on the companies itself rather than just political uncertainty. And implications for the government and the currency and so forth.

You mentioned semiconductors, and of course attech has been a huge trade in twenty twenty four, but even when it comes to the broader global space, we are seeing this continued tit tat between Washington and Beijing. Beijing now retaliating on that increased AT band. When it comes to Chinese access to advanced technologies, how would you rate this environment right now going into twenty twenty five. Can you still see some upside in these techniques, especially around chips.

Yes, I think we have been invested in that space for quite some time, and in video we previously had escahein as we solved it quite a while ago. But I think the broader theme for us is that if you look at the Max seven and particularly big tech and the semiconductors, it's really been on the front end of the AI sort of evolution, and what we are seeing now is sort of moving towards that second stage, which is more infrastructure companies like Apple benefiting. And then also of late we have been adding onto the third stage, which is the services and software that's sit on top like a service now for example, So we have been taking profits and some of those big semiconductor names over the last while. I think we need to bear in mind that yes, the evaluations have run as well, and if you look at the expectations, they're still delivering a lot of earnings growth. But we just feel that it's probably time to be a bit more cautious and try and see if you can't broaden your portfolio out to other areas within that AI supply chain. And also then the broader economy in sectors into next year.

And political fighting over budgets really about to potentially double the French government as well, right, which is priced during the broader euro area. Any opportunities and this point that could pay off in the long run.

Okay, So we recently one of our investment team members went to Europe and I think he came back and really felt that there were quite slim pickings across the board. If you look at the major drivers of those economies France as well as Germany. You know, a lot of the vehicle makers have been in a bit of a session. They are really getting hammered on the luxury side, with China not doing very well. So we continue to do more work on opportunities within Europe, but the political uncertainty, particularly for a large economy like France, really does keep us a little bit on the sidelines. We want to see how this play out and how this will impact the equity market there. So we have Snarti Electrics for example, in our portfolios, but for the way is pretty limited at this point.

A Bretta. Always great to have you with us if ready on Goo as a client por Folo, Manager and investment specialist at Affinity Investment Management.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisoner and this is Bloomberg

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