Most people are aware of South Korea’s controversial declaration of martial law, which lasted only a few hours before being lifted by President Yoon.
This political move undoubtedly spooked the South Korean financial markets. The Korean won dipped almost 1% in a day against the USD. The iShares MSCI Korea ETF (EWY) dropped as much as 7.1% intraday following the martial law announcement, though it stabilized to close down 1.6% for the eventful day.
The martial law declaration should not be seen as an isolated incident but as the climax of ongoing political tension between President Yoon and the opposition party. President Yoon has been summoned to court several times and convicted of election-law violations, while his wife faces an impeachment motion. In response, President Yoon has vetoed bills passed by parliament, escalating the standoff.
This declaration may provide the opposition with even greater impetus to challenge the President. It could also harm South Korea’s vital tourism sector, as political instability may deter foreigners from visiting, fearing they could be caught in turmoil.
South Korea’s challenges extend beyond domestic politics. Historically, China and South Korea shared a strong trade relationship, with China once serving as South Korea’s largest trading partner. However, relations began to sour in 2017 when South Korea allowed the deployment of the U.S. THAAD missile defense system, which China viewed as a provocation. Chinese boycotts of Korean products followed, with notable casualties such as Lotte Mart, which exited the Chinese market after incurring billions in losses.
Since then, South Korea’s reliance on China has declined. Exports to China fell from 25.9% of total exports in 2020 to 19.7% in 2023, while exports to the U.S. have risen. In fact, the U.S. became South Korea’s largest export market in 2023. However, with Donald Trump back in office, there is now a possibility of new tariffs targeting South Korean companies, further complicating South Korea’s export-driven economy.
South Korea is grappling with significant domestic and external challenges that are unlikely to be resolved quickly. These difficulties are reflected in the MSCI South Korea Index (tracked by EWY ETF), which is down 14% year-to-date, while neighboring markets enjoy double-digit returns.
Samsung, South Korea’s largest and most recognized company, has seen its share price decline 33% year-to-date. However, some South Korean stocks have delivered positive returns, including SK Hynix, Hyundai, and Kia.
Despite South Korea’s struggles, the impact on global markets has been minimal and is likely to remain contained. The S&P 500 closed at a record high on the same day martial law was declared, indicating that investors in the U.S. remain unfazed by South Korea’s political turbulence. Japan’s Nikkei 225 opened higher, further suggesting that regional markets outside South Korea are unaffected. While South Korea’s KOSPI index was down 1.4% at the time of writing, this reaction appears isolated to its domestic markets. For now, the situation does not pose a significant risk of cascading into a broader global market decline, making it a concern primarily for South Korean investors rather than the world at large.