The Daily Update - Korean elections - A new moon

South Korea has been captained by a conservative president and government for a decade but that looks almost certain to change next week as those on the tip of the Korean Peninsular exercise their suffrage and demonstrate their displeasure with the recent scandals within the ‘Liberty Korea Party’. Even those who have recently lost faith in polls can reasonably expect Moon Jae-in of the ‘Democratic Party of Korea’ as a shoo-in next Tuesday; he now leads in the polls by double digits (44% vs closest rivals Ahn (23%) and Hong (13%)). Moon, a former human rights lawyer was runner-up against Park Geun-hye in 2012, and was back then supported Ahn Cheol-soo, who is now his closest trailing rival for the presidency. Ahn, who founded a successful software business, also founded the ‘People’s Party’ in 2016. His support flourished on the flounders of Park, and at times Ahn had been ahead in the polls. But now with less than a week to go Moon’s popularity continues to stride ahead.

Because of the impeachment of former president Park, over allegations of venality, whoever tallies the largest number of votes on April 9 will immediately become president. Their executive powers will be quite extensive, even if his Democratic Party’s plurality of seats in the National Assembly struggles to give him the backing he needs. Of particular concern, this change of guard will clearly affect the wider international tactics regarding North Korea. If Moon brings his expertise and aspirations for greater neighbourly rapprochement with the North, this will stand in stark contrast to Trump’s recent ratcheting of strong-arm tactics in the region. How these differences will iron out in reality is difficult to predict but the overall market expectation for a Moon victory seems increasingly benign.

Domestically, Moon has called for a combination of KRW 10tn of economic stimulus and a widespread reform of corporate governance that will help disentangle the long-spun web of corruption and nepotism between the Chaebols and government. Just as importantly a more stable political environment should be a boon to the economy in the years ahead. But he will have to tread carefully and hope his stars align if he is going to achieve real reform with the powerful Chaebols: which account for 50% of Korean GDP and also half of the KOSPI. Even with the aftermath of the recent presidential scandal and the negative news cycle surrounding North Korea, the KOSPI is now only a fraction of a percent off all-time highs and the Korean won has remained strong. Neither, it seems, are equity markets subdued by the prospect of Chaebols losing their favourable tax conditions.

Its ageing society and outsized household debts remain a concern to be monitored, but the country has seen a healthy increase in their current account surplus over recent years and has an economy expected to grow above 2.5% and maintain inflation around 1.3%. The country also has only modest net foreign debts according to our analysis. Moreover with many established large corporates and quasi-sovereigns and a government rated Aa2 the country offers a number of candidates that match our investment process and current outlook. Yet although we have held numerous Korean bonds in the past when they offered relative value, in recent years they have traded expensive with other regions clearly offering more attractive risk-reward. We have recently begun to see some past favourite Korean issues offering better value. Our investment process, including our relative value model and our credit and macro analysis, will help identify if and when any of these become attractive enough for inclusion in our portfolios.

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