What’s worse than billionaires who bribe government officials? The “Gangnam Left,” stock pickers may say.
The term, and subject of a book by Chonbuk National University professor Kang Jun-man, is a dig at South Korea’s wealthy elite who advocate socialist policies, such as boosting the minimum wage and spending billions to create public-sector jobs. Some of these technocrats have found themselves in hot water recently: President Moon Jae-in’s recently appointed justice minister is now facing corruption allegations.
Moon came to power after a bribery scandal involving some of the country’s biggest family-run conglomerates, or chaebol, led to the impeachment of his predecessor, Park Geun-hye. To his credit, Moon, South Korea’s most left-wing president in a decade, has made some progress toward his campaign promise of chaebol reform. Companies including Samsung Electronics and Hyundai Motor have restructured, while the Kospi Index’s payout ratio -- the share of profit firms return to their investors -- has hit the highest level in at least two decades.
Yet the notorious Korea discount, which stems from investors’ wariness about chaebol, hasn’t narrowed. Rather, the Kospi’s valuation has sunk to a decade low, as measured by its price-to-book ratio. So much money has been lost that Seoul last month talked up re-instituting a ban on short selling, which was lifted in 2013.
You could be tempted to blame the US-China trade war. South Korea’s economy is built on exports, often in highly cyclical industries such as semiconductors. Yet shares of manufacturers like Samsung, for instance, haven’t suffered much this year.
What’s troubling traders now is Moon himself. While he remains largely popular with the public, the corporate community is deeply skeptical of his policies. A case in point: The private sector’s capital-investment growth, a measure of the country’s business outlook, has been declining since Moon took office in 2017, well before the trade war began in 2018.
As I’ve written, a double-digit hike in the minimum wage over the past two years has burdened smaller businesses with more expensive staff. Meanwhile, draconian measures to cool the real-estate market, such as imposing a pre-sale price cap in Seoul, have caused new housing starts to tumble in tandem with construction stocks.
To make matters worse, there’s a growing feeling that Moon has mishandled South Korea’s spat with Japan and is in danger of alienating the US. Seoul’s decision to end an intelligence-sharing agreement last month irked Washington. President Donald Trump, meanwhile, has said the country should pay “substantially more” for American protection against North Korea.
In recent decades, post-World War II political allegiances have evolved into economic dependencies; to prosper, an export-oriented emerging market needs to stay close to the US. South Korea is now wading in uncharted waters.
The country also will have a tough time staying neutral as the fight for technological supremacy between Beijing and Washington intensifies. China is by far the largest recipient of South Korea’s exports, which account for 44 percent of its GDP. Unfortunately, the US’s move to block chip sales to the mainland only backfires on an American ally: Semiconductors account for roughly a third of South Korea’s shipments to China.
Ironically, South Korea could have served as a haven in a global sell-off, with its 10 biggest chaebol accounting for more than half of the Kospi’s market capitalization. Billionaire heirs certainly won’t be quick to rush out the door -- and could even prop up their conglomerates’ stock prices with share repurchases. By adding another layer of political uncertainty, however, the Moon administration is only increasing South Korea’s market-risk premium, steepening the Korea discount that the president has been trying to close.
By definition, stock markets celebrate capitalism and entrepreneurship. Chaebol, with their murky political ties and complex cross-holdings, have been no allure to investors. Adding a socialist government only saps animal spirits further.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. -- Ed.