crisis, what crisis?

The Curious Calm of South Korean Stocks

Cheap valuations and earnings growth are a bigger factor than missile tests.
Photographer: SeongJoon Cho/Bloomberg

Are investors being too complacent?

North Korea has been a big trouble-maker this year, firing 18 missiles during 12 tests since February. Nonetheless, the Kospi Index has soared 16 percent in 2017. The benchmark gauge didn't move by more than 1 percent on any of the days when Kim Jong Un's regime conducted its tests.

On Thursday, the Kospi dropped 0.4 percent, less than half the 1.1 percent decline in Hong Kong's Hang Seng Index, which was buffeted by the North Korean tensions.

Firing Up

South Korea's benchmark index gained 16 percent this year despite a series of missile tests by the North

Source: Bloomberg

Note: The chart shows only the two test-firings of intercontinental ballistic missiles by North Korea.

Granted, the Kospi is down almost 4 percent from its late July high, while the Korean won has depreciated 1 percent. But much of this decline reflects the recent weakening of the global economy. In July, manufacturing purchasing managers' indexes for major economies from the U.S. and China to the Eurozone fell from their June levels. The South Korean president's proposal to levy higher taxes on large firms also dented sentiment. 

So why the muted reaction? After all, a conflict with North Korea could well mean economic devastation. During the Korean War of 1950 to 1953, the South lost 1.2 million lives and saw the value of GDP fall by more than 80 percent.

World-weariness may be a factor: The standoff over North Korea's weapons program has persisted for more than a decade, without any serious outbreak of hostilities yet.

Still, there are other, fundamental reasons for the market's resilience. One is that, even after this year's rally, South Korea remains cheap. It's now valued at 9.5 times forward earnings, below the 10-year average of 10 times.

Value Play

Kospi remains cheap despite this year's rally

Source: Bloomberg

South Korea is such a growth story that investors simply don't want to sell on a few soundbites from overheated politicians. Sell-side analysts have been revising up their earnings estimates for the first time since 2011, which partly explains why the Kospi's valuation hasn't risen despite the share-price rally. 

Corporate Growth

Korea Inc. sees strong upward earnings revisions for the first time since 2011

Source: Bloomberg

Much of those earnings aren't dependent on the domestic economy: The country is about as export-oriented as it gets. Companies in the MSCI South Korea Index generate 41 percent of their revenue overseas, HSBC Holdings Plc estimates. Samsung Electronics Co. gets only 10 percent of its sales locally, while the figure for SK Hynix Inc. is 6 percent and for LG Display Co. 7 percent.

To be sure, any conflict on the Korean peninsula could disrupt the technology supply chain and hurt global growth. South Korea has about a 17 percent share of the semiconductor market and accounts for 40 percent of liquid crystal display production. 

Still, such calculations may be academic, given the huge dislocations that would be caused by a war. That would be a problem for the entire world, not just South Korea.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren in Hong Kong at

    To contact the editor responsible for this story:
    Matthew Brooker at

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