A screen displays the Korea Composite Stock Price Index (KOSPI) at the Korea Exchange (KRX) headquarters in Seoul, South Korea, on Dec 4, 2024. - Bloomberg
KUALA LUMPUR: Malaysian investors are keeping an eye on South Korea’s political developments given their importance in regional economic growth although they have minimal impact on Malaysia.
UOB Kay Hian Wealth Advisors’ Investment Research head Mohd Sedek Jantan said the situation warrants monitoring because sustained instability could create ripple effects.
"Malaysia’s stable economic fundamentals and strong trade ties provide a solid foundation but ongoing engagement with regional developments will be essential to managing potential long-term risks.
"Moreover, South Korea’s solid economic performance offers reassurance that the broader economic environment remains robust, despite the political challenges,” he told Bernama.
South Korea’s political stability
South Korea’s financial markets were rattled after President Yoon Suk-yeol’s sudden declaration of martial law on Tuesday, causing the US dollar/South Korean won exchange rate to surge to 1,440.
The National Assembly unanimously overturned the decision a day later and South Korean authorities have since reassured markets that financial operations will proceed as usual, with the Bank of Korea pledging unlimited liquidity support and scheduling an emergency meeting this morning.
Despite the swift reversal, Mohd Sedek noted that concerns about South Korea’s political stability have persisted.
"Reports indicated that the martial law declaration was a result of growing tensions between President Yoon and the opposition-controlled National Assembly, with limited backing from key figures within Yoon’s party.
"With martial law now revoked and likely intervention from the Bank of Korea, the won is expected to recover its losses, and the immediate impact on South Korean equities should remain contained,” he said.
Nonetheless, the situation has left lingering concerns over South Korea’s political and economic stability, Mohd Sedek said.
During New York trading hours, South Korean assets, especially the won and South Korea-focused exchange-traded funds (ETFs) experienced significant pressure, although some of the losses were recovered by the end of the session, he said.
In the Korean Treasury Bond (KTB) market, foreign investors are expected to reduce their holdings due to heightened uncertainty, pushing bond yields higher while the Bank of Korea’s dovish stance and liquidity pledges are likely to support short-term bond yields.
"These developments highlight South Korea’s fragile political environment and the risks of prolonged policy paralysis, which could weigh on investor sentiment and hinder foreign equity inflows,” he said.
Despite political unrest, Mohd Sedek noted that South Korea’s economic fundamentals remain strong, with the Manufacturing Purchasing Managers' Index rising to 50.6 in November versus October’s 48.3.
South Korea's third-quarter 2024 real gross domestic product grew 1.5 per cent year-on-year versus a 0.2 per cent contraction in the previous quarter. The export sector, particularly semiconductors, continues to perform well.
"This indicates that South Korea’s economic fundamentals are on solid ground, which should provide some resilience against the political uncertainties,” the analyst said.
Risks and opportunities for Malaysia
The investment research analyst said South Korea’s political and economic turbulence holds both risks and opportunities for Malaysian investors.
"The two countries recently strengthened their relationship by upgrading it to a strategic partnership, enhancing collaboration in key sectors such as defence, trade, renewable energy, and critical minerals.
"While South Korea’s short-term volatility is unlikely to directly impact Malaysia’s stock market due to its relative insulation from external shocks, prolonged instability in South Korea could indirectly affect Malaysian sectors closely tied to South Korean investments and trade.
"These include technology, manufacturing, and critical minerals, where shifts in demand or sentiment may arise from continued political uncertainty in South Korea,” said Mohd Sedek.
On a more positive note, he said the global risk aversion shift could lead some investors to move their portfolios away from South Korea toward more stable markets like Malaysia.
"This may provide temporary support for Malaysia’s equities and bond markets, which continue to be viewed as relatively stable investment options in the region.
"The swift action by the Bank of Korea to stabilise the markets also highlights the importance of central bank responsiveness in maintaining investor confidence throughout the region,” he said.
Another concern is South Korea’s sovereign credit rating, he said.
"Although a downgrade has not been announced, the ongoing political instability could result in a more cautious outlook from rating agencies if investor sentiment continues to weaken.
"This would make South Korean debt less attractive to foreign investors, and highlight the stability of Malaysian assets,” he added. - Bernama
