Political Scandal Rocks South Korea
As someone who lives on the leading edge of technology, let me set the record straight about South Korea…
The country is a legit rock star!
For starters, South Korea boasts the world’s fastest internet connection speed.
It’s also home to technology powerhouse Samsung.
Most importantly, however, South Korea is a key hub for innovation incubators.
The country registered 18,000 patents with the U.S. Patent and Trademark Office last year.
For comparison’s sake, every South American country combined registered about 750 patents.
(Brazil sat atop South America’s patent list with a measly 320 filings.)
Armed with such technological prowess, South Korea should be represented in any truly diversified portfolio.
Yet the nation was recently rocked by (yet another) political scandal — the result of which landed President Park Geun-hye in the clink.
To be prudent, I asked my senior analyst, Martin Hutchinson, to unpack the situation in South Korea.
So far, South Korean indexes are showing strength.
In fact, the president’s jailing is having virtually no effect.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Question: Martin, let’s address the situation in South Korea. Our readers might not be aware, but South Korea should be on their radar screens. Tell us why.
Martin Hutchinson: It’s got a very important technology sector and some very exciting growth companies. Also, in the past, it’s been a very well-run country. So historically, you should have had some money in South Korea. Plus, the market’s not overvalued at all.
Question: Martin, what about the political situation with the president being forced to resign?
Martin Hutchinson: President Park Geun-hye was forced to resign on March 11 and indeed was arrested on March 31, the basic problem being corruption. It’s a long-term problem in Korea, because the last opposition president, Roh Moo-hyun, was prosecuted for corruption and committed suicide in 2009 before he could be arrested. So it’s clearly a problem for both sides.
For investors, I think the outlook has turned a bit darker. Park herself was from the center-right Saenuri Party, but her economic policy wasn’t very good. They’ve had sluggish growth, and they’ve got big problems in shipping, which is obviously not entirely her fault. The government’s been expanding. It was only 24% of GDP 10 years ago, and now it’s up to 32%.
Also, the head of Samsung appears to be heading to jail. (Putting their business leaders in jail seems to be a bad habit for Korea.) It’s still one of the smallest governments in the OECD (Organization for Economic Co-operation and Development), but it’s only just ahead of Switzerland, though it looks like it will lose that position fairly quickly.
In the next election, the main opposition candidate, Moon Jae-in and his Minjoo Party, favors higher public spending. They’re in favor of jailing conglomerate leaders, and they jailed several of them when they were last in power in 2003–08. Moon himself was Roh Moo-hyun’s chief of staff. They’re well ahead in the polls at 35%. The Liberty Korea Party, which is what the center-right party is called now, is at 8% — with their candidate, Hong Joon-pyo.
Question: Hutch, that sounds messy. I know you advocate an internationally diverse portfolio. So where do you stand on including South Korean investments as part of a diversified portfolio?
Martin Hutchinson: Normally, I’m strongly in favor of including South Korea as a substantial part of a diversified portfolio, but I think I’d hold off for now. Public spending looks like it’s rising faster under a left-center government. And corruption won’t be addressed, in the sense that both parties seem to have corrupt presidents.
They may well go into Keynesian deficit spending, which they haven’t in the past. They’ve been running budget surpluses most of the time. Their public debt’s only 36% of GDP, so that’s not an immediate problem. But it’s obviously a red flag down the road.
Then there’s the problem of harassing chaebol [South Korean conglomerates]. It’s as if the U.S. had the habit of putting the president of General Motors and the president of Goldman Sachs in jail regularly. It doesn’t do much for the economy.
Until the elections happen on May 9 and we’ve had a month or so to see the new government’s policies, I’d suggest holding off for now. Even though South Korea should normally be part of their portfolios.
Question: OK, Hutch, so we’ll put all companies domiciled in South Korea on hold for now, until you give us the all-clear. Fair enough?
Martin Hutchinson: That sounds right, and I hope to be back to you in June with some more news.
Question: Thanks for your time, Hutch.
Martin Hutchinson: Great to be with you.
Question: This is Wall Street Daily signing off.
Senior Analyst, Wall Street Daily