In the past few months, South Korea has suffered a protracted presidential impeachment scandal, while the export-dependent economy had struggled amid lacklustre global growth. Yet the Kospi index has just risen to a new all-time high.
There’s a bit less to this than meets the eye, as Song Jung-a points out in the FT. Electronics giant Samsung, a conglomerate that also dabbles in engineering, shipbuilding and credit cards, accounts for no less than a quarter of the Kospi. It has just cancelled some shares, which means it will concentrate dividends and ownership rights in the remaining ones, making them more appealing.
South Korea also still faces some serious problems, especially North Korea. Investors appear to have “become desensitised” to this ever-present threat, however, as Justin Jiminez says on Bloomberg – having lived with a demented neighbour for so long, investors are no longer fazed for long by anything it does. Another headwind is China’s block on tour groups visiting South Korea following Seoul’s deployment of Thaad, an American missile defence system to guard against nuclear missiles from the North. China is worried the system’s sophisticated radar could allow the US to spy on its own military moves.
Nevertheless, there are reasons for optimism. New president Moon Jae-in has vowed to tackle the chaebols, the big, opaque, often family-run conglomerates that have a firm grip on the economy. They are now so big and influential they are stifling competition, while their large cash reserves help explain why wage growth and investment has been subdued, says Jiminez.
The chaebols’ corporate governance is notoriously poor, with dividends low and few rights for minority shareholders. Moon wants the national pension fund, the top investor in Korean equities, to adopt a stewardship code, and is planning to beef up shareholders’ rights. That should help tackle the perennial discount on Korean shares compared with the global average.
Finally, the global economy is warming up. South Korean exports jumped by 24% year-on-year in April. In the past few years exports have averaged 50% as a proportion of GDP. Overall growth in Korea reached a three-year high of 2.7% in the first quarter of 2017. Reform prospects and the cyclical upswing look strong enough to eclipse the negatives and keep the rally going for now.
Chinese cash boosts Pakistan
This is “a good time to be a broker in Karachi”, says Henny Sender in the FT. In late 2016, three Chinese stock exchanges paid $85m to secure 40% of the Pakistan Stock Exchange. And there will be plenty more where that came from. China is expected to invest $55bn over the next five years, which should “provide functioning infrastructure”. Crucially, it means building power plants to rectify chronic energy shortages – a key impediment to growth.
There are other reasons why the stockmarket has just hit a record high. Index provider MSCI downgraded it from emerging- to frontier-market status after the financial crisis. But it is now reversing this decision, which implies more funds will be able to buy the market – many are not allowed to invest in high-risk frontier states.
There is a bit more visibility on the political front, with the Supreme Court deciding not to disqualify the prime minister – currently being investigated for alleged corruption – from office, as Bloomberg notes. Strong consumption is expected to underpin GDP growth of 5.2% this year, up from an already impressive 5% in 2016.