What’s next for stocks after South Korea lifts martial law?

Analysts say South Korea’s unusual political drama is likely to compound an already bleak outlook, but some see reason for further optimism if a more severe crisis can be avoided.

President Yoon Seok-yeol suddenly announced yesterday evening that he would declare martial law, saying that the country must be protected from North Korea’s “communist forces” and “anti-state forces” must be eradicated.

The shock declaration, widely seen as a response to domestic pressure, was reversed within hours. Representative Yoon’s decision to rescind the order came after about 200 lawmakers unanimously entered the National Assembly to block the order.

The political whiplash has put South Korea, a key U.S. ally and a vital link in international supply chains, in the world’s spotlight and unsettled financial markets.

U.S.-listed Korean stocks plummeted in the wake of Yoon’s first martial law, and the Korean won hit a two-year low against the U.S. dollar. The currency has since recovered most of its losses.

Just before markets opened on Wednesday, Vice Minister of Strategy and Finance Kim Byung-hwan said regulators were ready to inject 10 trillion won ($7.06 billion) to stabilize the stock market “at any time.” Korea Yonhap News Agency reported.

South Korea’s KOSPI index closed 1.44% lower on Wednesday, paring losses of more than 2% from the previous day as opposition lawmakers initiated impeachment proceedings against Yun.

“The current situation is much calmer, but given how important South Korea is to the global supply chain, it remains a story to watch,” Deutsche Bank strategists said in a research note published Wednesday.

Jonathan Garner, Morgan Stanley’s chief equity strategist for Asia and emerging markets, said on CNBC’s “Street Signs Asia” on Wednesday that Wall Street banks are underweight Korean stocks.

“Our view on the Korean market is that it is not very well positioned amidst the global economic downturn, especially as it is one of the most trade exposed markets and regions we cover amid ongoing tariff and non-tariff issues. no see.” Garner said.

“But also, the semiconductor cycle is starting to take shape in a downtrend, and in addition, the automotive sector is experiencing significant difficulties globally, and that is largely in the Korean market,” he continued.

“Even before these recent events, our economists had expected Korea’s growth rate to fall below 2% next year, one of the largest slowdowns we have seen globally.”

Shares of South Korea’s largest company, Samsung Electronics, fell 1% on Wednesday, while battery maker LG Energy Solutions and automaker Hyundai Motors recorded losses of 2.8% and 2.4%, respectively.

Negative price movements and volatility are likely to continue across Korean assets and interconnected markets, particularly Asian foreign exchange markets, Rory Green, head of Asia research and chief China economist at TS Lombard, said in a research note published Wednesday.

The South Korean won was flat at 1,414.22 against the U.S. dollar on Tuesday, before falling to 1,444.93 on Tuesday, according to LSEG data. This is the weakest level since October 2022.

Trinh Nguyen, chief economist at Natixis, described Yoon’s push to declare martial law as a “very, very poor decision” and a blow at a bad time for South Korea.

“Martial law hasn’t been introduced since 1979 and is viewed as a very negative thing. So the reversal of martial law is positive. But it brings a lot of political uncertainty going forward, especially the future of General Yoon,” Nguyen told CNBC. said to “Squawk Box Asia” takes place on Wednesday.

“This is not a positive time for Korea, is it? The chip cycle is in a downtrend as you can see exports contracting in October, (the Bank of Korea) had to cut interest rates (and) domestic demand is somewhat weak,” she said. continued.

“So we need a strong government to ensure that we have a budget that supports us not only in the short term but also financially to address the issues that arise from potential tariffs, not just from China,” Nguyen said.

Not everyone is so discouraged about the impact of South Korea’s unfolding political drama on markets.

“First of all, new reports suggest that Chairman Yoon will be impeached or resign fairly quickly, which may be a sign investors are concerned about the incident,” Thomas Mathews, head of Asia-Pacific markets at Capital Economics, said in the study. “It can help you draw a line,” he said. The note was posted Wednesday.

“Presidential impeachment is not unprecedented in Korea, and at least Korean stocks have performed quite well as a result during the most recent impeachment in 2016/2017,” he added.

Matthews acknowledged that the disruption came at a difficult time for the country, but said the Capital Economics team had reason to be more optimistic as long as a bigger crisis could be avoided.

“Ultimately, Korea’s big tech companies are well-positioned to benefit from the current enthusiasm for AI and technology in general, so I think that could happen if investor sentiment for Korea eventually improves. ” said Matthews.

“But first more water will have to flow under the bridge,” he added.