Market Analysis

A Political Update From Korea

Korean President Park Geun-hye's fall from power shouldn't override the country's other positive drivers.

From Brexit and Trump to Italy, Brazil and the Philippines, 2016 has been a year of political upheaval and theatrics. And it isn't over yet. South Korean President Park Geun-hye is embroiled in an influence peddling scandal that has outraged the country and likely numbered her days in office. She has offered to step down from office in April 2017-10 months before her term is slated to end-but lawmakers in the National Assembly instead introduced an impeachment bill, which gets a vote Friday December 9. While Park's political fall looks inevitable, Korea's political issues needn't derail its other positive drivers. For global investors, whether or not you own any Emerging Markets stocks, this is another lesson in the importance of thinking long-term and not getting hung up on short-term events.

The movement against Park appears more about her actions (which you can read all about here), not a broader distaste with the government or the state of society. After decades of chaebol (Korea's huge, family-run mega conglomerates/corporate fiefdoms) dominating political decisions and the economy, corruption has emerged as the societal cause du jour (see this summer's draconian corruption bill), and Park appears a victim of the times. The scandal also coincides with some economic softness, as a slowdown in global trade hit export-oriented businesses hard. In response, the country's largest sectors-which account for a fifth of GDP and employ nearly 15% of the workforce-have undergone significant corporate restructuring. More recently, scandals at several chaebol only further weighed on sentiment.

South Korea has also faced some geopolitical uncertainty in recent months. Besides long-running issues with North Korea, which has made progress in its nuclear program, new tensions with China have arisen as South Korea recently deployed an advanced US missile system. In addition, Donald Trump's victory made many call into question the future of Asia's trade relationship with the US given his campaign rhetoric and dismissal of the Trans-Pacific Partnership. There is also a potential domestic political headwind, as the legislature's opposition party favors tax hikes, with eight different proposals put in the supplementary budget bills. With one of the world's stronger fiscal positions (40% debt to GDP), such a move makes little economic sense, but the negative fallout is likely short term.

However, these developments are mostly well-known, and while they may have weighed on equity performance a bit, Korea has performed largely in line with EM for the year. Most importantly, they don't negate the country's solid economic drivers, which should matter more to forward-looking stocks than a political scandal. Korean GDP grew 2.6% y/y in Q3, bolstered by steady domestic consumption. Steepening yield curves globally benefit Korea's financial sector, boding well for future lending-and thus, growth. Plus, reality is better than most folks appreciate. Global trade isn't in the dire shape many fear, China hasn't had an economic "hard landing" (and one doesn't look likely), and the Western developed world continues driving global growth. With these conditions unlikely to reverse for the foreseeable future, Korea looks poised to benefit and may even surprise to the positive-not difficult given how negative sentiment currently is.

Markets move most on the gap between reality and expectations, and all year, they've been resilient to political upheaval. Stocks got over Brexit in two trading days, Trump in a few hours, and Italy's referendum in a few seconds. Brazilian stocks thrived throughout ex-President Dilma Rousseff's impeachment trial this year. Korea should be similarly resilient, reiterating this important lesson-one investors should keep in mind throughout next year's busy geopolitical calendar.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.