(Bloomberg) — South Korea’s currency recovered while its stocks fell Wednesday, as investors braced for prolonged political uncertainties following a brief decree of martial law by President Yoon Suk Yeol.
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The benchmark Kospi closed 1.4% lower, while a gauge of equity volatility climbed by the most in three weeks. The won gained 1.2% to 1,410.56 per dollar, to erase most of its overnight loss. Credit default swaps for South Korean government debt widened 2.75 basis points, according to traders, poised for the biggest increase since early August, data compiled by Bloomberg show.
Yoon sparked chaos with the late Tuesday decree, sending the won and South Korea-related exchange-traded funds sharply lower overnight. 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,” said Joohee An, chief investment officer at Mirae Asset Global Investments Co. in Hong Kong. “The latest drama is not going to help the Korea market rerate when it’s already trading at steep discounts versus other Asian markets.”
Yoon’s shocking order was a high-stakes move he claimed would prevent the main opposition Democratic Party from trying to paralyze his administration amid a rift that’s now set to deepen markedly. The Democratic Party submitted a motion calling for the impeachment of Yoon over the martial law order.
The political turmoil doesn’t bode well for nation’s ongoing push for upgrades to developed market status in global indexes. It’s 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.
Banks were among the worst hit in Wednesday’s stock selloff, along with companies seen as related to Yoon policies including nuclear energy and corporate reform. Shares of the nation’s largest company Samsung Electronics Co. were the biggest drag on the Kospi, falling 0.9%. Retail investors instead piled into meme stocks seen as related to opposition party leader Lee Jae-myung.
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