South Korea's Political Tumult: A Storm for Investors

South Korea's political landscape has been roiled by President Yoon Suk Yeol's surprise declaration of martial law, which was swiftly rejected by parliament. This unexpected move has sent shockwaves through the markets, with the won hitting a two-year low and the Kospi Index plummeting nearly 2%. As the dust settles, international investors are grappling with the fallout and reassessing their exposure to Korean assets.

The 'Korean Discount', an elevated risk premium on Korean assets, has been a persistent concern for investors. The martial law episode has accentuated this discount, making foreign investors even more risk-averse. Fund managers like Sat Duhra of Janus Henderson and Daniel Tan of Grasshopper Asset Management have expressed caution, warning of increased uncertainty and a lack of won stability.

South Korean equities, led by the KOSPI benchmark, have been trading at a significant discount to other emerging markets. The martial law crisis may exacerbate this discount in the long term, impacting the attractiveness of Korean equities and potentially bonds and currency. However, the government and Bank of Korea's commitment to 'unlimited liquidity' could help mitigate this discount.

International investors are viewing South Korea's political stability with increased skepticism post the martial law episode. The decision-making clarity and rule of law have been called into question, raising concerns about the country's macroeconomic outlook. A delayed impeachment process and leadership change could exacerbate economic uncertainty, impacting the won and equities, and discouraging foreign direct investment.

As investors navigate this political storm, a balanced portfolio approach may be the key to weathering the uncertainty. Combining growth and value stocks, and favoring under-owned sectors like energy, could present opportunities in the face of market volatility. However, investors should remain vigilant and monitor developments closely.



In conclusion, South Korea's political crisis has created a challenging environment for international investors. The 'Korean Discount' has been accentuated, and political uncertainty is weighing heavily on the market. As investors assess the long-term impact and potential opportunities, a strategic and cautious approach will be crucial.