Written by: Chen Hanxue
Source: Wall Street Insight
So far this year, Asian stock markets have been mixed against the backdrop of a strong dollar.
Among them, some achieved a stock market bull run in domestic currency at the cost of currency depreciation, while others sacrificed part of the stock market's gains with relatively stable exchange rates.
Only South Korea is an exception:
In terms of won, the South Korean composite index KSOPI has fallen 10.0% this year; considering the depreciation of the won, the dollar-denominated KSOPI has dropped 18.9%, both being the weakest in Asia.
Most of the 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, while residents are clustering around cryptocurrency trading.
From the perspective of capital flows, since the second half of this year, only institutions in South Korea have maintained a net buying scale in the stock market, while the resident sector has been continuously reducing purchases.
Foreign investors are even more pessimistic. In November, foreign investors net sold South Korean stocks worth 41.5 trillion won, marking four consecutive months of net sales. In the two weeks since the beginning of December, they net sold another 24 trillion won.
The money that South Korean residents have taken out of 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 has reached 15.59 million, an increase of 610,000 from the previous month. Currently, 30% of the 51 million South Koreans are trading cryptocurrencies.
The average daily trading volume of South Korea's five major cryptocurrency exchanges—UPbit, Bithumb, Coinone, Korbit, and GOPAX—rose from 3.4 trillion won in October to 14.9 trillion won in November, an increase of more than four times.
Koreans have always been keen on investing in cryptocurrencies.
In the first cryptocurrency bull market in 2017, about 5% of the population participated; in the second round of bull market in 2021, 10% of the population participated; now this proportion has expanded to 30%.
Historically, the Korean stock index has shown a positive correlation with Bitcoin prices, until October this year, when this positive correlation was completely broken.
So the decline in the Korean stock market, is Bitcoin to blame?
Is the export really strong?
In 2023, the proportion of South Korea's export value in GDP reached as high as 40%. As an export-oriented economy, exports are a barometer of South Korea's economy.
Recent data suggests that South Korea's exports may be showing signs of recovery.
The Korea International Trade Association announced that exports in November showed a year-on-year increase of 1.4%, maintaining an upward trend for 14 consecutive months, but the growth rate has slowed.
Data from the South Korean Customs for the first 10 days and the first 20 days of December showed year-on-year export growth of 12.4% and 6.8%, respectively, indicating that South Korea's exports in December should not be weak.
However, behind this phenomenon, it is more likely due to concerns over Trump's tariffs causing a rush.
From the perspective of export fundamentals, South Korea's main export industries such as semiconductors, automobiles, and chemical products are facing unfavorable prospects.
Figure: Export structure of South Korea in 2022
First, it's the weakness of semiconductors.
South Korea's domestic semiconductor giants Samsung Electronics and SK Hynix are primarily focused on memory chips, which only constitute 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.
Data from Trend Force 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%, with the gap between the two companies widening from 36.5% in Q3 2020 to 51% now.
Insufficient policy support is the main reason; South Korea lacks government subsidies similar to those in the US, mainland China, and Taiwan, making it difficult to promote chip localization.
South Korea's key semiconductor materials, components, and equipment are also highly dependent on overseas sources. Data from the Korea Customs Service shows that in 13 sub-sectors of semiconductor equipment, more than half have long been in a trade deficit.
Especially since the Yoon Suk-yeol government chose to decouple hard from the Chinese market, the South Korean semiconductor industry, which is extremely reliant on the Chinese market, has seen a dramatic decline. In 2023, the proportion of chips shipped by South Korean companies among China's chip imports has fallen to 6.3%, down from over 10% previously.
Secondly, the automotive manufacturing industry is also clearly at a disadvantage in competition.
In 2023, the total global sales of Korean cars reached over 8 million units, an increase of more than 7% year-on-year, but the market share of new energy vehicles was only 9.3%.
China is currently the largest and fastest-growing market for new energy vehicles in the world. In 2023, total car sales in China reached 30.09 million, with a new energy vehicle market share of as high as 31.6%. The scale of the Chinese 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.
In contrast to German, American, and Japanese car companies, which actively launched long-wheelbase and customized models based on the characteristics of Chinese consumers, South Korean car companies have been slow to act and insufficient in research and development, compounded by the transformation difficulties in the new energy sector, making Korean cars struggle in the Chinese market.
Finally, the export of petroleum products (refining industry) is also facing some downward pressure.
In November this year, South Korea's largest oil refiner SK Energy announced its third-quarter results:
In the July-September quarter, the refining business recorded 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 refining product market being squeezed..."
"We 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 Asian refining profit margin fell to its lowest level since the third quarter of 2022.
Now, under the influence of massive production increase prospects and gradually disappearing demand, the market is bearish on oil prices in the long term, restricting refiners' output and export prospects.
The latest corporate management outlook survey released by the Korea Enterprises Federation shows that:
Due to widespread concerns about export conditions, 65.7% of surveyed companies reported that they have already developed their operational plans for next year, among which 49.7% of companies' operational guidelines are 'tight management,' the highest level since the survey began in 2019.
The Bank of Korea stated that
"In 2025, we will implement additional interest rate cuts to alleviate the downward pressure on the economy."
In the face of exchange rate headwinds, the South Korean central bank's determination further highlights its economic weakness.
Political turmoil continues
The recent emergency martial law incident regarding the South Korean president has made the already weak fundamentals in South Korea even worse.
On November 29, the South Korean National Assembly's budget settlement committee forcibly passed a budget cut proposal in the absence of ruling party lawmakers from the People Power Party, completely cutting special activity fees for the presidential office, prosecutors, the Board of Audit and Inspection, and the police, while significantly reducing the government's emergency reserve fund by a total of 41 trillion won, meaning that the Yoon Suk-yeol government will be unable to function due to a lack of funds next year.
On December 3, President Yoon Suk-yeol imposed martial law, escalating the conflict between the government and the house.
The conflict between the government and the house is essentially a budget dispute; South Korea has faced severe fiscal pressure in the past two years.
The Yoon Suk-yeol government implemented a tax reduction policy for the wealthy in 2023, leading to the largest fiscal revenue drop in South Korea's history. The report from the Ministry of Economy and Finance shows that South Korea's total tax revenue in 2023 was 497 trillion won, a decrease of 77 trillion won from the previous year.
Yoon Suk-yeol's actions are indeed 'robbing the country to enrich the wealthy.'
Currently, South Korea's fiscal deficit remains significant; in September of this year, the deficit reached 52.89 trillion won, accounting for 2% of the nominal GDP in 2023.
To cope with the fiscal crisis, the Yoon government even cut the research budget in South Korea by 15% this year, marking the first time since 1991 that the government made such a decision.
On December 15, the South Korean National Assembly officially passed an 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 leadership.
……
Even if the impeachment case determines Yoon Suk-yeol's defeat, the future of the political situation in South Korea is even more puzzling, which may further exacerbate foreign investors' bearish sentiment.
With both domestic and foreign capital being pessimistic, where will the South Korean stock market head next year?