The Korean perseverance
The global macroeconomy is going through difficult times with the credit crises in Southern Europe, concerns of slowing U.S. consumption and fear of a hard landing in China.
Korea is not immune to these developments and as a result the Korean equities markets are going through turbulent times, as are the rest of the global equities markets. This is evidenced by the massive foreign net selling out of Korea's equities markets over the past few months.
However, the optimist in me says that this is an opportune time for Korean companies and equities markets to shine amidst the storm. My belief is based on the perseverance of the Korean people, their ability to cope with various downturns, and the capacity to come back even stronger.
In addition to these current concerns, we should not forget that Korea had other national and regional risks through which it persevered, and to a certain degree, emerged even stronger if judged by stock market performance.
In the past fifteen months, Korea has endured the sinking of the Cheonan naval vessel, the artillery fire by the North Koreans on the island of Yeonpyeong, and the nuclear disaster of Japan.
These were not just simple disruptions to the nation but major risk events. The investigation of the Cheonan sinking provided evidence that North Korea was behind the attack while the shelling of Yeonpyeong island was the first time that the South's land and civilians were attacked since the Armistice in 1953.
As for the tragic Japan earthquake, Korea's proximity to the nation presented radioactive risk to the nation. All these developments were very real and major threats to the nation and one can argue that they represented a "perfect storm" for Korea and yet the nation emerged intact with no major negative consequences.
In just about a year after the first of these events, the Korean stock market reached its historic high of 2229 on May 2 this year. Who would have thought this was possible even just a few years ago?
This reminds me of the Asian financial crisis of 1997. Korea as a nation was on the verge of bankruptcy and had to be bailed out by the IMF.
The solidarity of the nation and the willingness to be flexible to not just survive but to emerge even stronger is a big testament to the will of the people. In just over a decade since then, Korea has emerged as a true global leader in several industries _ semiconductors, mobile phones, LCD TVs, automobiles, and shipbuilding. Let's not forget that Korea also had the quickest recovery among OECD nations from the sub-prime financial crisis just a couple of years ago.
Let's now focus on the performance of Korean stock market following these events in just a little more than a decade.
The traditional argument for Korea's market was that it needed to trade at a discount to the region due to geopolitical risks and corporate governance issues. Who says that needs to hold true now?
Although remaining somewhat true, the geopolitical discount factor has diminished significantly as the market is becoming less prone to the words and actions from our neighbors to the north.
As for corporate governance, I would argue that Korean corporates have undergone a major transformation since the Asian financial crisis of the late 1990s and are now role models for corporates in other emerging markets to emulate. Korean corporates do care about their investors.
On the liquidity front, several positive developments are coming up: The compulsory shift towards 401k pension plans, heavier weighting of equity investments by the National Pension Service, and legislation to allow on-shore-based hedge funds in Korea.
All of these, along with low interest rates will provide abundant domestic liquidity flowing into the Korean equity market. Also, retail investors are shifting their investment appetite from property markets to capital markets, especially in the equity market. This trend is more apparent with rapidly growing wealth in Koreans.
Sure, there will be the ups and downs for Korea as it is intricately tied into the global economy. But, my view is that the perseverance of the people will once again prove that Korea can thrive during periods of difficulties.