Martial Law Shocks South Korean Markets: How Investors Should Respond

The sudden declaration of martial law by South Korean President Yoon Suk Yeol sent shockwaves through the nation's financial markets on Tuesday, December 4, 2024. The unexpected move, aimed at protecting freedom and constitutional order, sparked investor concerns about political instability and unrest. As a result, South Korean assets tumbled, with the iShares MSCI South Korea ETF (EWY) plunging 7.1% in US trading and the onshore Korean won weakening 2.9% against the dollar.



The iShares MSCI South Korea ETF fell 2.8% intraday and Franklin FTSE South Korea (FLKR) dropped 2.4%, both hitting two-year lows earlier in the day. Other South Korean stocks and ETFs, such as Matthews Korea Active (MKOR) and JAKOTA K-Pop and Korean Entertainment (KPOP), also experienced significant declines. Even companies with significant exposure to South Korea, like Texas Instruments (TXN) and Qualcomm (QCOM), saw their stocks fall.



While the declaration of martial law has caused immediate market disruptions, South Korea's robust economy and resilient investors suggest a potential long-term recovery. In the past, South Korean markets have shown the ability to bounce back from political shocks. For example, following the 2016 political turmoil, the iShares MSCI South Korea ETF rebounded by 12.8% within three months.

In light of this political uncertainty, investors should consider adjusting their portfolios to reduce exposure to South Korean stocks, particularly those in sensitive sectors like technology and finance. Instead, they could invest in more stable, diversified companies with strong management and enduring business models, such as Morgan Stanley, Amazon, and Apple.



To manage the risks associated with political instability, foreign investors should consider diversifying their portfolios and hedging against currency and equity risks. This can be achieved by maintaining a close watch on the evolving political situation and being prepared to scale back investments or exit if the martial law escalates.

In conclusion, while the declaration of martial law has caused immediate market disruptions in South Korea, investors should remain calm and avoid making hasty decisions. By diversifying portfolios and hedging against currency and equity risks, investors can effectively manage the risks associated with political instability and prepare for potential long-term recovery.