By Steven Orlowski
South Korean stocks rose today in the aftermath of the historic election of the first female president, Park Geun-hye. Park is the 60-year old daughter of a former dictator. She is a member of the conservative party and will be replacing outgoing President Lee Myung-bak.
Time will tell if Park’s election will be a boon or bane for South Korean stocks. The citizenry seems optimistic, as Park won the election by a respectable margin. Park stated that she intends to be the president of a country that keeps its promises. Given her agenda, it will be interesting to see the impact of the promises she is able to keep.
A problem for investors has been the “chaebol” -- powerful, family-run conglomerates that have been accused of illicit business practices including “cross-holding,” where a small group is able to control numerous subsidiaries under a single conglomerate. These groups unduly influence business activity, at times suppressing fair competition, which could enhance productive economic growth.
Park intends to increase government spending to support small and mid-sized businesses. Park wants to grow the middle class to about 70% of the entire population. Both activities should help South Korean stocks.
Park is open to speaking with North Korea regarding topics including financial aid. The amount of aid South Korea will provide will be determined by the North’s willingness to reduce or eliminate its nuclear arms program. Park is pro-military, and is committed to working with the U.S. to deter North Korea’s nuclear ambitions. She also wants to develop natural resources in North Korea in cooperation with Pyongyang. This is a tricky proposal, considering the nuclear arms controversy. Park says humanitarian aid for North Korea should continue, regardless of political situations.
Hopefully, Park’s tenure will coincide with continued success for the South Korean stock market. EWY, the iShares MSCI South Korea Index Fund (EWY), has performed well for several years.
Over the past six months, it is up from nearly 20%, increasing from approximately $52.00 per share to more than $62.00 per share today.
Since EWY’s lows during the financial crisis, the ETF has more than tripled. It traded below $20.00 per share late in 2008 and as noted, is above $62.00 today.
Going back more than 12 years, the ETF displays a distinct propensity to move higher. It did lose about 75% of its value peak to trough during the financial crisis, but it has regained most of those losses and looks poised to move higher.
Changes in political leadership can always deliver unexpected surprises. I am optimistic for South Korea, but we’ll have to watch EWY closely.