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Stocks

South Korean stocks hit 6-year high, shrug off political tensions

Economy gets a lift from exports, masking turmoil and nuclear fears

HONG KONG -- From domestic political turmoil, to Chinese consumer boycotts, to North Korea's nuclear saber-rattling, South Korea is beset by uncertainties. Yet its stock market remains breezy.

In fact, the market is close to setting an record. The benchmark Kospi index rose for a fourth straight trading day on Tuesday, closing up 1.1% at 2,196.85, its highest point in six years and nearing its all-time high of 2,228.96, reached on May 2, 2011.

Samsung scales the heights

Shares rose strongly Tuesday, driven higher by blue chips. Samsung Electronics was a particularly strong performer, rising more than 3% to renew its all-time high on news that its newest smartphone is selling briskly. Hyundai Motor shares climbed 2%, while oil wholesaler SK Innovation soared on news of robust earnings. Big risers also included electricity and financial stocks.

The brisk market comes despite worries over Pyongyang's military provocations. Tuesday was the 85th anniversary of the founding of the Korean People's Army, which raised fears that the North might have chosen the day to conduct another nuclear or ballistic missile test.

The U.S. Navy has sent a naval strike group, led by the aircraft carrier Carl Vinson, to waters near North Korea to put pressure on the reclusive country, and President Donald Trump has not ruled out military action.

Even discounting the military tension, South Korea faces many negative factors for investors, including political turmoil following the removal of President Park Geun-hye from office over bribery accusations, and strained relations with China over Seoul's deployment of the U.S. anti-missile system known as Terminal High Altitude Area Defense, or THAAD.

Shrugging off bad news

"The European market's rise has had a positive effect on the Korean market, along with foreign investors who invested in the Kospi, with net buying of 650 billion won ($576 million)," said Lee Jong-woo, head of research at IBK Securities. "The fundamentals are also not bad. Since March, the Korean economy shows signs of recovery, driven by rising exports. Corporations also posted good [earnings] performances in the first quarter. Foreign investors bought Samsung Electronics stock, expecting the [most valuable issue] on the market to rise continuously."

Toru Nishihama, a senior economist at Japan's Dai-ichi Life Research Institute, believes the brisk external demand that South Korean industry is seeing is overwhelming the negative factors. "There may be problems in the country, as well as with its neighbors, but the external demand couldn't be better," he said.

In March, the country's exports jumped 13.7% on the year to $48.9 billion, according to South Korea's Ministry of Trade, Industry and Energy. The figure marks the fifth straight month of growth and the third month of double-digit rises. The last time the country did that was in 2011.

Exports of semiconductors, general machinery and cosmetics reached record levels, the ministry said.

In particular, export of chips, one of South Korea's top industries, rocketed more than 40%, indicating a global recovery, led by the information technology sector. That is giving a big lift to the country's export-oriented economy, pushing the country's domestic political turmoil and geopolitical risks to the back of investors' minds. Brisk exports of consumer goods, such as cosmetics, indicate the boycotts of South Korean products brought on by Chinese anger over the THAAD deployment have not been all that significant.

Global barometer

South Korean stocks are more sensitive to global factors than regional ones, with foreigners making up a high percentage of investors.

According to daily statistics from Korea Exchange, operator of the stock market, foreign investors' net buying of Kospi index stocks has recovered significantly. On Monday, the figure reached 338 billion won, a five-week high.

This points to a higher risk tolerance among foreign investors, who took their cue from the U.S. Nasdaq composite's record high, and from the first round of the French presidential election.

However, risks associated with North Korea remain.

If the peninsula tips into accidental armed conflict, South Korean stocks will not escape unscathed. But for the time being, the prevailing market view is that "it is unthinkable that the U.S. will launch a pre-emptive strike against North Korea," said Dai-Ichi Life's Nishihama. Because such a strike would put the survival of the Trump administration at risk, Washington must make a measured judgment, he said.

Some investors may be getting carried away, believing the plunge in won triggered by concerns over an emergency on the Korean Peninsula could "work positively, rather than negatively" for South Korean exports, Nishihama said.

Lee of IBK Securities takes a similar position. "The North Korean issue seems to have little impact on the Korean stock market. Investors and market players do not believe the risk will escalate to threaten the market and the economy."

Companies, meanwhile, are seeing strong earnings as the South Korean economy picks up. Chipmaker SK Hynix on Tuesday reported that its net profit surged 324% on the year in January to March. Sales were up 72%. Its shares were unchanged, limited by thin buying after the earnings release. Investors took a breather following a run-up in anticipation of strong results. But the strong sentiment spilled over into the Tokyo market, as buying picked up for shares of Tokyo Electron and other semiconductor manufacturing equipment makers.

According to the QUICK FactSet data service, South Korea's LG Display, LG Electronics and Samsung Electronics are expected to announce significant increases in net profit for the January to March quarter, sometime this week.

At a time when expectations tend to soar on news of brisk earnings, South Korean stocks' unexpected bull run may continue for some time.

Nikkei staff writer Kim Jaewon in Seoul contributed to this report. 

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