South Korea’s currency strengthened on Wednesday, while its stock market suffered significant losses, as investors reacted to heightened political uncertainty following President Yoon Suk Yeol’s unexpected declaration of martial law. The country’s benchmark Kospi index closed 1.4% lower, and a measure of equity volatility surged by its largest margin in three weeks. The won, however, gained 1.2% against the dollar, recovering most of its earlier losses, and settled at 1,410.56 per dollar. Meanwhile, credit default swaps for South Korean government debt widened by 2.75 basis points, the largest increase since early August.
The political drama began late Tuesday when President Yoon issued a martial law decree, triggering panic in the financial markets. The immediate aftermath saw a sharp drop in the won and South Korean exchange-traded funds. While authorities quickly reassured markets with promises of “unlimited liquidity,” investor confidence in the country’s financial stability has been shaken. This episode also presents a significant challenge to the government’s “Corporate Value-Up” program, which aims to address the persistent undervaluation of South Korean equities.
Joohee An, Chief Investment Officer at Mirae Asset Global Investments in Hong Kong, expressed concern over the growing political instability, stating, “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.” An further emphasized that the political turmoil could hinder efforts to improve South Korea’s market valuation, which remains deeply discounted compared to other Asian markets.
President Yoon’s controversial decree was intended to thwart opposition-led efforts to destabilize his administration, as tensions between his government and the Democratic Party escalate. In response, the opposition party has called for Yoon’s impeachment over the martial law order, further deepening the political crisis.
The ongoing turmoil is also complicating South Korea’s efforts to gain upgrades to developed-market status in global financial indexes. The market has struggled to recover from previous shocks, including the government’s sudden ban on short-selling roughly a year ago, which startled international investors.
Despite efforts by the Yoon administration to tackle the “Korea Discount” — the persistent undervaluation of South Korean stocks — little progress has been made. The Kospi currently trades at about 0.8 times its one-year forward estimated book value, compared to 2.9 times for the MSCI World Index, according to Bloomberg data.
The stock selloff on Wednesday disproportionately impacted banks and companies tied to Yoon’s policies, including those in the nuclear energy sector and corporate reform initiatives. Samsung Electronics, South Korea’s largest company, saw a 0.9% decline, contributing significantly to the overall drop in the Kospi. Meanwhile, retail investors turned to meme stocks, particularly those linked to opposition leader Lee Jae-myung.
In response to the market volatility, South Korea’s top financial regulator, Kim Byoung-hwan, stated that authorities are prepared to take “all possible measures” to stabilize markets. A 10 trillion won ($7 billion) stock market stabilization fund is available for immediate deployment if necessary. The Bank of Korea has also announced plans to increase short-term liquidity and address any potential currency volatility. Despite the turmoil, Yoon Kyoungsoo, director general of the central bank’s international department, noted that foreign-exchange liquidity remains stable following the brief martial law decree.
Some analysts are hopeful that a swift resolution to the political standoff could lead to a market rebound. The situation evokes memories of the 2016-2017 political crisis, which culminated in the impeachment of President Park Geun-hye. During that period, the Kospi posted a 6% gain over three months leading up to the court’s impeachment ruling in March 2017.
“Markets will prefer a quick resolution to the standoff and for political stability to return,” said Jun Rong Yeap, a market strategist at IG Asia in Singapore. He added that if more clarity emerges, political calm could gradually return, potentially easing market tensions.
This latest round of instability comes on top of broader challenges faced by the South Korean economy. The won has fallen approximately 9% against the dollar this year, making it the worst-performing Asian currency, while the Kospi has lost over 7%.
Jung In Yun, CEO at Fibonacci Asset Management Global, concluded, “Yoon’s political career appears to be nearing its end. Short-term, this could be seen as a buying opportunity, but the long-term issues related to the Korea Discount will continue to act as a headwind for economic growth.”
Related topic:
How To Invest In Currency Futures?
