Author: Chen Hanxue, Wall Street News
Since the beginning of this year, Asian stock markets have experienced mixed performances amid a strong dollar.
Among them, some achieved a bull market in stocks denominated in local currency at the cost of exchange rate depreciation, while others sacrificed part of the stock market's gains at the cost of relatively stable exchange rates.
South Korea is the only exception:
In won terms, the South Korean Composite Index KSOPI has fallen 10.0% this year. After taking into account the decline in the won, the KSOPI in US dollar terms has fallen 18.9%, both of which are the weakest in Asia.
The main declines occurred in the second half of the year. The 24H1 KSOPI once rose by nearly 20%, but the second half of the year wiped out all the gains.
What happened in South Korea in the second half of the year?
Foreign capital flees, and residents gather together to speculate in cryptocurrencies
Judging from capital flows, since the second half of this year, only institutions in South Korea have maintained net purchases of the stock market, while the household sector has been continuously reducing its purchases.
Foreign investors are even more pessimistic. In November this year, foreign investors sold 4.15 trillion won of Korean stocks, marking the fourth consecutive month of net selling. In the two weeks since the beginning of December, they sold another 2.4 trillion won.
Most of the money that Korean residents took out of the stock market was used to "speculate in cryptocurrencies."
Data from the Bank of Korea (BOK) shows that as of November, the number of 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 Korean citizens are speculating in cryptocurrencies.
The average daily trading volume of South Korea’s top five cryptocurrency exchanges — UPbit, Bithumb, Coinone, Korbit, and GOPAX — more than quadrupled from 3.4 trillion won in October to 14.9 trillion won in November.
South Koreans have always been keen on investing in cryptocurrencies.
During the first bull run of cryptocurrencies in 2017, about 5% of the population participated; during the second bull run in 2021, 10% of the population participated; now this proportion has expanded to 30%.
But historically, the South Korean stock index and the overall Bitcoin price have been positively correlated, until October this year, when this positive correlation was completely broken.
So, is Bitcoin to blame for the Korean stock market's decline?
Is export really strong?
In 2023, South Korea's exports accounted for 40% of its GDP. As an export-oriented economy, exports are a barometer of the South Korean economy.
South Korea's exports seem to be picking up recently.
The export data for November released by the Korea International Trade Association showed that the export value in November increased by 1.4% year-on-year, maintaining the growth trend for 14 consecutive months, but the trend has slowed down;
The export value data released by the Korean Customs for the first 10 days and 20 days of December increased by 12.4% and 6.8% year-on-year respectively, indicating that South Korea's exports in December should be strong.
But behind this phenomenon, it is more likely that Trump's concerns about tariffs led to a rush.
From the perspective of export fundamentals, South Korea's major export industries such as semiconductors, automobiles, and chemicals all face unfavorable prospects.
Figure: South Korea’s export structure in 2022
First, there is the weakness of semiconductors.
South Korea's local semiconductor giants Samsung Electronics and SK Hynix mainly focus on memory chips, which only account for about 30% of the entire semiconductor market. Compared with 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 of the global foundry market was 62%, while Samsung Electronics was only 11%. The gap between the two companies has widened from 36.5% in 2020Q3 to 51% today.
The main reason is the lack of policy support. South Korea lacks government subsidies similar to those in the United States, mainland China, and Taiwan, making it difficult to promote the localization of chips.
South Korea's key semiconductor materials, components and equipment are also highly dependent on overseas. According to data from the Korea Customs Service, more than half of the 13 sub-sectors of semiconductor equipment have been in a long-term trade deficit.
In particular, the Yoon Seok-yeol government chose to hard-decouple from the Chinese market, causing a cliff-like decline in the Korean semiconductor industry, which is extremely dependent on the Chinese market. In 2023, the proportion of chips shipped by Korean companies in China's chip imports has fallen to 6.3%, which had previously remained above 10%.
Secondly, the automobile manufacturing industry has also fallen clearly at a disadvantage in the competition.
In 2023, the global sales volume of Korean cars will reach more than 8 million, a year-on-year increase of more than 7%, but the market share of new energy vehicles will be only 9.3%.
China is currently the world's largest and fastest-growing new energy vehicle market. In 2023, China's total auto sales will reach 30.09 million units, with new energy vehicles accounting for 31.6%. The scale of China's auto industry is nearly four times that of South Korea, and the share of new energy vehicles is more than four times that of South Korea.
Compared with German, American and Japanese automakers who have proactively launched long-wheelbase, customized versions and other models based on the characteristics of Chinese consumers, Korean automakers have been slow to act and lack research and development efforts. Coupled with the difficulties in the transformation to new energy, Korean cars are in a difficult situation in the Chinese market.
Finally, exports of petroleum products (refining industry) also face certain downward pressure.
In November this year, SK Energy, South Korea's largest oil refiner, announced its third-quarter results:
The refining business posted an operating loss of 616.6 billion won ($450.2 million) in the July-September quarter, the biggest loss since the fourth quarter of 2022.
The company stated,
“We are in an unfavorable macro backdrop with lower crude oil prices and the overall refined product market being squeezed…
We will continue to maintain minimum operating rates for crude distillation units (CDUs) to prevent negative margins..."
Data from the London Stock Exchange showed that Asian refining margins fell to their lowest level since the third quarter of 2022 in June-August this year.
Today, with a lot of production growth prospects and potential and gradually disappearing demand, the market is bearish on oil prices in the long term, constraining refiners' production and export prospects.
The latest survey results of the Korea Business Federation on corporate business outlook for 2025 show:
Due to widespread concerns about export conditions, 65.7% of the surveyed companies said they had already formulated business plans for next year, of which 49.7% of companies adopted a "tight management" business policy, the highest level since the 2019 survey.
The Bank of Korea said:
"Additional interest rate cuts will be made in 2025 to ease downward pressure on the economy."
Facing exchange rate headwinds, the Bank of Korea's resolute determination further highlights its economic weakness.
Political turmoil continues
The recent development of the South Korean president’s emergency martial law has made the already weak fundamentals of South Korea even worse.
On November 29, the Budget and Accounts Committee of the South Korean National Assembly forcibly passed a budget cut bill in the absence of members of the ruling People Power Party. It cut all special activity expenses of the presidential office, the Procuratorate, the Audit Office and the police, and significantly reduced the government's emergency reserve fund, a total of 4.1 trillion won, which means that Yoon Seok-yeol's government will be shut down next year due to lack of money.
On December 3, South Korean President Yoon Seok-yeol declared martial law, bringing the dispute between the government and the legislature to a climax.
The dispute between the government and the legislature is actually a dispute over the budget. South Korea has been under extremely severe financial pressure in the past two years.
The Yoon Seok-yeol government's tax cuts for the rich in 2023 led to the largest drop in fiscal revenue in South Korea's history. The settlement report of the Ministry of Strategy and Finance of South Korea showed that South Korea's total tax revenue in 2023 was 497 trillion won, a decrease of 77 trillion won from the previous year.
Yoon Seok-yeol's move is actually "robbing the country to enrich itself."
Today, South Korea's fiscal deficit remains significant, reaching 52.89 trillion won in September this year, accounting for 2% of nominal GDP in 2023.
To cope with the fiscal crisis, the Yoon administration even cut South Korea's scientific research budget by 15% this year, the first time the South Korean government has made such a decision since 1991.
On December 15, the South Korean National Assembly formally passed the impeachment case against South Korean President Yoon Seok-yeol. On the 16th, Han Dong-hoon, the leader of South Korea's ruling party, announced his resignation as party leader.
……
Even if the impeachment case dooms Yoon Seok-yeol to defeat, the future of South Korea's political situation will become even more confusing, which may further exacerbate the bearish sentiment of foreign investors.
With both domestic and foreign investors pessimistic, where will the Korean stock market go next year?
