South Korea Tacks Left With New President, But Stocks Have Other Drivers
Political pressure on the chaebol is poised to rise, but corporate governance efforts already underway and end-market demand have proven tailwinds that have so far trumped politics.
After nearly a decade of conservative administrations, South Koreans have elected a leftist human rights lawyer as president. Moon Jae-in’s pledges to take a conciliatory tact with Kim Jong-un’s volatile regime in Pyongyang and to get tough with the South’s powerful conglomerates resonated, garnering the son of North Korean refugees just more than 40% of the vote in near record turnout.
Leading up to the May 9 election, South Korean stocks hit record highs, notwithstanding political turbulence and geopolitical tensions. U.S. President Donald Trump has sought to isolate North Korea, pressure its backers in Beijing and neutralize Pyongyang’s developing nuclear and ballistic missile programs with the recent deployment of a U.S. anti-missile system in the South. Moon’s victory comes on the heels of the impeachment and jailing of his predecessor, Park Geun-hye, over corruption charges involving alleged bribery payments and influence peddling from the country’s chaebol conglomerates.
As Emerging Views has often noted, politics can often push stock prices beyond what business fundamentals would imply—on both the up and down-sides. Samsung Electronics, for instance, was implicated in the Park scandal and its heir apparent, Lee Jae Yong, was indicted along with a handful of other Samsung executives. Lately, though, Samsung has been working on corporate governance and shareholder friendly reforms, including increased dividends and the cancellation of some $35 billion in legacy treasury shares. The share price of Samsung, which recently reported its second-biggest quarter of operating profit, is up 81% over the last year. For now, rising dynamic random access memory (DRAM) prices seem to matter more to Samsung’s minority shareholders than Lee’s legal issues and, perhaps, his path toward taking control of the conglomerate.
That’s not to say a government’s economic and fiscal policies don’t matter, as the “reflation” trades in Europe and the U.S., on the one hand, and the utter collapse in Venezuela, on the other, demonstrate. Apart from a softer approach toward Pyongyang, Moon, who takes office immediately given Park’s impeachment, says he wants to raise taxes on the very rich and “top corporate earners” to expand the public sector, hiring more firefighters, teachers, police, et al. He has also talked about raising the minimum wage and boosting benefits for part-time and contract workers.
But just how much he’ll push and how far he’ll be able to go on these initiatives remains to be seen. Conservative economist Kim Kwang-doo and Cho Yoon-je, a market-friendly economic advisor to former president Roh Moo-hyun, are reportedly advising Moon. Moreover, while he won with the 40% plurality of votes, his main conservative and centrist opponents together secured nearly 47% of votes cast. With Moon’s Democratic Party holding just 40% of the single-chamber assembly, he won’t be able to pass legislation without cobbling some sort of coalition together, implying he can’t veer too far from center.
That may disappoint his mostly younger voters, though better economic growth would mitigate any disappointment. Older voters, who mostly cast their ballots for the other two main candidates on national security concerns, have longer memories, stretching past the North’s recent alleged use of the banned VX nerve agent to assassinate Kim Jong-un’s half brother in Malaysia, to its putative arms sales to terror groups over the years, to its downing of Korean Air Flight 858 and Rangoon bombing in the 1980s. Moon’s “reconsidering” the U.S. anti-missile system will likely upset the U.S., but it may also prompt Beijing, which opposed the system’s deployment, to ease its tacit economic pressure on South Korea, whose most important export market and key source of tourist arrivals is China. Any such easing could help South Korea, which is Asia’s fourth-largest economy, maintain the acceleration in its economic growth this year.
Efforts to put smaller companies on more even footing with the chaebol after decades of corporatism and anti-competitive practices would also ultimately make for a more developed capital market and healthier economy. South Korea ranked 52, right after Rwanda and just before Namibia, in Transparency International’s “Corruption Perceptions Index” in 2016, and scored 53, worsening from 56 the year before (the higher the score on a 0-100 scale, the less perceived corruption). So there’s still plenty of work to do. But progress is being made. In the World Bank’s “Ease of Doing Business Survey” as of June 2016, South Korea ranked an impressive five overall, and in terms of sub-category rankings was 13 in protecting minority investors, first in enforcement of contracts and fourth in resolving insolvency.
Moon’s spending plans, if he obtains legislative approval, may pressure the fiscal deficit, which the government had budgeted at a modest 1.7% of GDP this year, though with gross government debt at just 47% of GDP, a bit more public spending wouldn’t capsize the country’s public coffers or debt load.
South Korean stocks have had a good run, and it wouldn’t surprise to see investors take a little off the table until the political and economic outlooks become clearer. But especially in the case of Samsung and Hynix, which account for nearly two-fifths of the MSCI Korea Index, the outlook for DRAM demand matters much more.