Original author: Chen Hanxue
Reprinted from: Lawrence, Mars Finance
Since this year, Asian stock markets have experienced mixed results against the backdrop of a strong dollar.
Among them, some achieved a bull market in local currency stocks at the cost of currency depreciation, while others sacrificed part of the stock market's gains for a relatively stable exchange rate.
Only South Korea is an exception:
In terms of Korean won, the cumulative decline of the KOSPI index this year is 10.0%. Considering the depreciation of the won, the KOSPI priced in USD has declined by 18.9%, both being the weakest in Asia.
The main declines occurred in the second half of the year. The 24H1KSOPI once rose nearly 20%, but all gains were wiped out in the second half.
What happened in South Korea in the second half of the year?
Foreign capital is fleeing, residents are banding together to trade cryptocurrencies.
in terms of capital flows, since the second half of this year, only institutions in South Korea have maintained net buying in the stock market, while the residential sector has been continuously reducing purchases.
Foreign capital is increasingly pessimistic. In November this year, foreign capital net sold South Korean stocks worth 4.15 trillion won, marking four consecutive months of net selling. In the two weeks since early December, they net sold another 2.4 trillion won.
A large amount of money that South Korean residents withdrew from the stock market has largely gone into 'trading cryptocurrencies.'
Data from the Bank of Korea (BOK) shows that as of November, the number of domestic cryptocurrency investors in South Korea reached 15.59 million, an increase of 610,000 from the previous month. Currently, among 51 million South Koreans, 30% are trading cryptocurrencies.
The average daily trading volume of South Korea's five major cryptocurrency exchanges—UPbit, Bithumb, Coinone, Korbit, and GOPAX—soared from 34 trillion won in October to 149 trillion won in November, more than quadrupling.
Koreans have always been enthusiastic about investing in cryptocurrencies.
During the first wave of the cryptocurrency bull market in 2017, about 5% of the population participated; in the second bull market in 2021, 10% participated; now this proportion has expanded to 30%.
However, historically, the South Korean stock index has shown a positive correlation with Bitcoin prices until October of this year, when this positive correlation was completely broken.
So does the decline in the South Korean stock market mean Bitcoin has to take the blame?
Is export really strong?
In 2023, South Korea's export value accounted for as much as 40% of GDP. As an export-oriented economy, exports are a barometer of South Korea's economy.
Recent exports from South Korea appear to be showing signs of recovery.
Data from the Korea International Trade Association shows that export figures for November increased by 1.4% year-on-year, maintaining an upward trend for 14 consecutive months, although the trend is slowing down;
Data released by South Korean customs for the first 10 days and 20 days of December shows year-on-year export amounts increased by 12.4% and 6.8%, respectively, indicating that South Korea's exports in December should not be weak.
But behind this phenomenon, it is more likely a rush caused by concerns over Trump's tariffs.
From the perspective of export fundamentals, South Korea's main export industries, including semiconductors, automobiles, and chemical products, face unfavorable prospects.
Figure: Korea's export structure in 2022
First, there is the weakness in semiconductors.
South Korean semiconductor giants Samsung Electronics and SK Hynix mainly focus on memory chips, which only account for about 30% of the entire semiconductor market. Compared to Taiwan, which has a complete supply chain including chip manufacturing, packaging, and testing, South Korea's presence is weak.
Trend Force data shows that in the second quarter of this year, TSMC's share in the global foundry market was 62%, while Samsung Electronics was only 11%, widening the gap between the two companies from 36.5% in 2020Q3 to now 51%.
Insufficient policy support is the main reason; South Korea lacks government subsidies similar to those in the United States, mainland China, and Taiwan, making it difficult to promote domestic chip production.
South Korea's key semiconductor materials, components, and equipment are also highly reliant on overseas sources. Data from the Korean Customs Service shows that in 13 sub-sectors of semiconductor equipment, over half have long been in a trade deficit state.
Especially since the Yoon Suk-yeol government chose to decouple from the Chinese market, resulting in a sharp decline in South Korea's semiconductor industry, which is extremely dependent on the Chinese market. In 2023, the proportion of chips shipped by South Korean companies in China's chip imports has dropped to 6.3%, down from over 10% previously.
Secondly, the automotive manufacturing industry is also clearly at a disadvantage in competition.
In 2023, global sales of Korean cars exceeded 8 million, a year-on-year increase of over 7%, but the market share of new energy vehicles is only 9.3%.
China is currently the largest and fastest-growing new energy vehicle market in the world. In 2023, China's total vehicle sales reached 30.09 million, with new energy vehicles accounting for 31.6%. The scale of China's automotive industry is nearly four times that of South Korea, with the market share of new energy vehicles being more than four times that of South Korea.
Compared to German, American, and Japanese car manufacturers who actively introduce long-wheelbase and customized models based on Chinese consumer characteristics, South Korean car manufacturers are slow to respond, lack research and development efforts, and face challenges in transforming to new energy, making it difficult for Korean cars in the Chinese market.
Finally, the export of petroleum products (refining industry) also faces certain downward pressure.
In November this year, South Korea's largest refiner, SK Energy, announced its third-quarter earnings:
In the 7-9 month period, the refining business incurred an operating loss of 616.6 billion won (450.2 million USD), the largest loss since the fourth quarter of 2022.
The company stated that
We are in an unfavorable macro environment, with falling crude oil prices and overall pressure on the refining product market…
will continue to maintain the minimum operating rate of crude oil distillation units (CDUs) to prevent negative profit margins…
Data from the London Stock Exchange shows that from June to August this year, the refining profit margins in Asia fell to the lowest level since the third quarter of 2022.
Now, under the influence of significant production increases and gradually disappearing demand, the market has a long-term bearish outlook on oil prices, restricting the production and export prospects of refiners.
The latest survey results from the Korea Employers Federation on the business outlook for 2025 show that:
Due to widespread concerns about export conditions, 65.7% of surveyed companies indicated they have already formulated their business plans for next year, with 49.7% of companies adopting 'tight management' as their business policy, the highest level since the 2019 survey.
The Bank of Korea stated that
In 2025, additional interest rate cuts will be introduced to alleviate downward economic pressure.
Facing the headwinds of exchange rates, the Bank of Korea's resolve further highlights the weakness of its economy.
Political turmoil is not yet over.
The recent emergency declaration by the South Korean president has further exacerbated the already weak fundamentals.
On November 29, the South Korean National Assembly's Budget Settlement Committee forcibly passed a budget reduction bill in the absence of ruling party members, cutting the special activity funds for the presidential office, the prosecution, the Board of Audit and Inspection, and the police, while significantly reducing the government's emergency reserve funds, totaling a cut of 4.1 trillion won, indicating that the Yoon Suk-yeol government will face a cash shortage next year.
On December 3, President Yoon Suk-yeol declared a state of emergency, escalating the conflict between the government and the parliament.
The conflict between the government and the parliament is actually a budget dispute; South Korea has faced severe fiscal pressure in recent years.
The Yoon Suk-yeol government introduced tax cuts for the wealthy in 2023, resulting in the largest fiscal revenue drop in South Korea's history. The Ministry of Strategy and Finance's settlement report indicates that South Korea's total tax revenue for 2023 is 497 trillion won, a decrease of 77 trillion won compared to the previous year.
Yoon Suk-yeol's actions are indeed 'robbing the nation to enrich the wealthy.'
Currently, South Korea's fiscal deficit remains significant; in September this year, the deficit reached 52.89 trillion won, accounting for 2% of the nominal GDP for 2023.
To cope with the fiscal crisis, the Yoon government even cut South Korea's research budget by 15% this year, the first such decision by the South Korean government since 1991.
On December 15, the South Korean National Assembly officially passed the impeachment motion against President Yoon Suk-yeol. On the 16th, the leader of the ruling party, Han Dong-hoon, announced his resignation from the party leader position.
…
Even if the impeachment case is destined for Yoon Suk-yeol's defeat, the future of South Korea's political situation is even more uncertain, which may further exacerbate foreign capital's bearish sentiment.
With both domestic and foreign capital being pessimistic, where will the South Korean stock market head next year?
