South Korea: Resolving Political Turmoil in 2025 May Boost Market

Kenneth Kim

ASSISTANT PORTFOLIO MANAGER

South Korea: Resolving Political Turmoil in 2025 May Boost Market

Kenneth Kim

ASSISTANT PORTFOLIO MANAGER

South Korea: Resolving Political Turmoil in 2025 May Boost Market

Kenneth Kim

ASSISTANT PORTFOLIO MANAGER

martial law causes south korea market decline, recovery likely in 2025

U.S. interest rate cuts, Value Up program hopes, and China’s economic stimulus spurred on South Korea’s stock market early in the first half of 2024, only to plunge in the latter half due to Black Monday in August, Donald Trump’s U.S. presidential victory, and the martial law fallout in December. Stocks fell and the won dropped to two-year lows on December 3rd after President Yoon Suk-yeol shocked the world by declaring martial law in an effort to block opposition parties in the parliamentary process. Parliament overturned the ruling within hours. However, the damage was done, reminding global investors again about the “Korean Discount” (investors have historically undervalued South Korea for reasons ranging from tensions with the North to the tight structures of its conglomerates).

The Korea Composite Stock Price Index (KOSPI) fell by 9.6% for the 2024 year, while monthly performance also declined for six consecutive months starting in July, marking its longest downturn in 16 years.  South Korean stocks declined indiscriminately, including globalized businesses like Kia Corp., Samsung Electronics and LG Electronics (Polaris holdings as of 02/01/25), none of which are solely reliant on a strong domestic economy.  So where does that leave the market in 2025? A lot depends on the political climate.
South Korean stock market

SCENARIOS AND POLITICAL UNCERTAINTY IN SOUTH KOREA

Scenario 1: Democratic Party of Korea (Democrats) push for impeachment, leading to a new president by April/May 2025. Consensus is scenario #1, as Democrats hold the majority at the government level. So they’re going to try to push the Constitutional Court to get this impeachment approved and done as soon as possible, which is about February/March 2025 timeline. Then when that goes through, Korea is going to have about 60 days to elect new president.

If that timeline works, we’re going to have new president by about April/May 2025, and the most likely candidate is Democratic Party leader Lee Jae-myung, considered a bit more left and radical than other candidates. But there is one complicating factor: Jae-myung himself is going through trials on election law violations; the first of which resulted in a guilty verdict, with an appeal ongoing.  If the guilty verdict is confirmed, this would make him ineligible to run for a public office, due to Article 19 of the Public Official Election Act.

Scenario 2: A whole new slew of candidates (from both the right and the left) running for presidential election.  It would be a process of elimination if Lee Jae-myung is unable to overturn the election tampering verdict and the Constitutional Court impeaches President Yoon.  There’s a short list of people from each party, but it may constitute some infighting before a clear frontrunner comes to the fore. 

GEOPOLITICS BATTER EVEN FUNDAMENTALLY STRONG SOUTH KOREAN STOCKS 

In a market drubbing, 67% of stocks on the main KOSPI and 80% on the KOSDAQ (the secondary trading board of Korea Exchange) declined in 2024, leaving investors who had hoped for the KOSPI to hit 3,000 at the start of the year with losses.  (Data as of December 17, 2024) A limited number of the declines were driven by company-specific issues; the broader market was heavily affected by political and economic headwinds in the second half.  Certainly, domestic companies were hurt as infrastructure spends and other investments have been pushed out, anticipating a new presidency. Different political parties have different agendas – more defense/less defense, lower taxes or status quo, etc. all of which determine where Korean won is spent. Unfortunately, the age-old idiom “don’t throw the baby out with the bathwater” wasn’t heeded, as fundamentally strong South Korean companies with globalized business models were punished along with their domestic-focused brethren.

A few examples:
  • According to recent data, around 17% of Samsung Electronics’ sales revenue is generated in South Korea, with the majority of their business coming from other regions like the Americas and Europe. Yet Samsung Electronics declined 40% in 2024. It’s true that Samsung is behind SK Hynix (Polaris holding as of 02/01/25) on high bandwidth memory. But there are no other players that can supply the artificial intelligence phase and supply high bandwidth memory outside of SK Hynix, Samsung and Micron; there is simply not enough capacity to meet demand, so Samsung is well position as a derivative AI play.

  • South Korean automotive major Kia Corp. announced record annual sales for 2024, achieving a new annual record with 3,089,457 vehicles sold, with 80% of sales outside South Korea. Yet Kia dropped 8% for the year.  Kia remains one of the few OEMs gaining market share on the back of a healthy product portfolio.  The company has been reporting record margins year over year, positioned for vertical integration with part makers and battery makers – making them more resilient than most other OEMs.

Let’s not dismiss the domestic companies that are quick to adapt, branching out to an international audience and meeting shareholder demand. Two Polaris portfolio companies come to mind.
  • Fashion company F&F Co. was down 30% on the year, as investor pessimism focused on sluggish local demand. What investors missed: F&F secured exclusive rights to the Discovery Channel (outdoor apparel) brand across Asia. Under the agreement, F&F will be allowed to produce and sell clothes, footwear and accessories under the Discovery Expedition brand in China, Japan and other Asian countries (Thailand, Vietnam, Singapore, Philippines, Indonesia, Hong Kong, Taiwan, etc.) through 2039. In China, F&F expanded MLB stores from 0 to 1,000+ in just 5 years. Replicating MLB’s success with the Discovery brand is a tall order but Discovery’s sales per store in China have already reached the sales per store level of MLB. Furthermore, F&F has the largest equity stake of global golf brand TaylorMade. Any unlocking of TaylorMade in a form of IPO, strategic transaction, or other alternative should give F&F a fresh look.

  • Shinhan Financial Group was an outlier, one of the few domestic companies succeeding in a difficult market – up 7% in 2024. Why? Their overseas investments paid off with record profits last year amid tougher business conditions in the local market. Shinhan Bank, the lender of Shinhan Financial, reported the largest-ever net profit of 549.3 billion won ($417.1 million) in 2023 from its overseas businesses thanks to healthy earnings from key markets such as Vietnam, Japan and even Kazakhstan. More importantly, as a response to Korea’s Value Up program, Shinhan was at the forefront among Korean companies boosting total shareholder return from just 26% in 2021 to ~40% in 2024. Since 2022, Shinhan started to adopt aggressive buyback and share cancellation policies, shareholder-friendly initiatives that meet the demands of many international investors.
F&F

TARIFFS AND FOREIGN EXCHANGE

All of this could change at the prospect of further tariffs imposed by the U.S. government.  Trump’s staunch approach to tariffs has toned down in recent discourse, as evidenced by Mexico and Canada.  And then ramped back up tacking on 25% tariffs on all steel and aluminum, including South Korea which has been historically exempt.  The steel and aluminum tariffs won’t likely have a major impact on South Korea’s economy, as those products account for less than 1% of its exports to the United States.

Doing the math: Kia Corp. has manufacturing facilities in the U.S.; the company sold about 800,000 cars in the U.S. in 2024. Kia’s Georgia plant has capacity to meet roughly half of total US sales and Georgia plant is a home for hot selling models such as Telluride, Sorento, Sportage, and EV9 models. 1,000 kilograms (1 metric ton) of steel costs about $700. 25% tax price will be $875 per 1 metric ton. It takes about 1 metric ton of steel to produce 1 car. Usage of aluminum per car is significantly smaller than the usage of steel per car. Assuming Kia sells 800,000 units where all steel is imported with 25% tariff, this is additional $140 million cost impact to Kia, which is 203 billion KRW. Kia generated about 12.7 trillion KRW of operating income for 2024, so additional steel impact from tariff would have been about 1.6% of total Operating Income for 2024. Unless there is heavy tariff on imported finished cars from South Korea, impact of tariff on steel and aluminum is quite minimal.  But the question remains about escalating tariffs on other products.  No one really knows what will happen.

Tariffs present a double-edged sword:
  1. No South Korean president in power to negotiate complicates and delays tariff negotiations on white goods, semiconductors, autos, etc.
  2. Tariffs will likely be added across the board, from Canada, Mexico, Japan, etc. The winner will be the country and company that can offer the most competitive price, volume and mix.  This is where an export-oriented country like South Korea can shine.  Why? The Korean won is weak; a weaker domestic currency stimulates exports. While weak won makes import of raw materials more costly, weaker won generally helps as most sales occur outside Korea and sales are converted in a weaker won.

PREDICTIONS FOR SOUTH KOREAN MARKETS IN 2025

Last year’s risks have been largely reflected in the market, limiting further downward pressure.  If domestic (a clear leader emerges) and international uncertainties are resolved in the first half of 2025, the South Korean stock market may show strong upward momentum… And although past precedent isn’t predictive, the KOSPI has never declined for two consecutive years since the 1997 financial crisis. This bodes well for prospects in 2025, and we expect that fundamentally strong portfolio companies like the aforementioned Samsung Electronics, Kia Corp., SK Hynix and a few select others will be among the best performers in a market recovery.

This blog was penned by Kenneth Kim, Assistant Portfolio Manager, in February 2025.  Mr. Kim joined Polaris as an Analyst in June 2016; he was promoted to Senior Investment Analyst in January 2021 and became an LLC member in January 2022. In January 2025, Mr. Kim was named an Assistant Portfolio Manager, working in cooperation with the portfolio managers on the investment direction of Polaris’ global and international portfolios.

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IMPORTANT INFORMATION: The views in this article were those of Kenneth Kim as of the article’s publication date (February 19, 2025) and may be subject to change. Information, particularly facts and figures, are dated and in many cases outdated. Views and opinions of Kenneth Kim expressed herein do not necessarily state or reflect those of Polaris Capital Management, and are not nor shall be used for advertising or product endorsement purposes.  Polaris Capital is an investment adviser registered with the Securities and Exchange Commission. For more information about Polaris, please contact us at (617) 951-1365 or email CLIENT SERVICE.

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