JULY 2019 FORBES INDONESIA | 19WHEN INVESTORS want
to take the pulse of emerg-
ing markets or technology
trends, they often look to
Asia’s fourth-largest econ-
omy. South Korea's com-
panies are major players in
key global industries from
smartphones and semicon-
ductors, to cars, chemicals
and beauty and entertainment. And Korea's $1.3 trillion
stock market is open to foreign investors. Non-residents
own more than one-third of its equities, one of the high-
est foreign ownership rates in the world.
The benchmark Kospi index has typically been seen
as a leading indicator of global trends due in part to
South Korean companies' ability to stay at the cutting
edge of technology and adapt to global consumer trends.
However, the Kospi and the broader Korean economy
have recently shown weakness. If South Korea, as a
global export powerhouse, leads the global business
cycle it may well be that US and Chinese equities start
to disappoint from here onward. Stocks of South Korean
cosmetics companies, whose products are popular with
Chinese travelers, have plunged on fears that trade ten-
sions will dent earnings. The fear among investors is
that South Korea may join the US-led ban on Huawei
and then China might retaliate in a similar fashion to
the deployment of US missile defense system in 2016. At
that time, China informally banned sales of group tour
packages and the appearances of South Korean celebri-
ties on Chinese TV shows.
The country most affected by the US-China trade
dispute is neither the US nor China, it’s South Korea.
Nearly 40% of South Korea's outbound shipments
go to the US and China. Samsung Electronics is the
world's leader in mobile phone sales, Huawei recently
overtook Apple to take the number-two spot. The US
government is lobbying South Korea not to use Hua-
wei products and while this is likely to help Samsung's
global market share, it is putting a lot of strain on the
relationship between Seoul and Beijing. In order to
prepare for a new post-trade war world and restruc-
turing of global supply chains, South Korea is embrac-ing Vietnam and moving more of its factories and man-
ufacturing away from China into Vietnam.
China has caught up with Korea and even overtaken
it in some sectors, while Japan is regaining its competi-
tiveness as its economy rebalances and comes up with
innovative technologies. Economic woes were high-
lighted in data this month that showed GDP shrank the
most in a decade as a result of declining investment,
weakness in the technology sector and falling exports.
South Korea implemented a new external audit
law last November after several accounting scandals
occurred that dented global investor confidence in
the quality of Korean financial statements. And the
new law is already having an impact by giving inves-
tors earlier warning signs of trouble ahead. Auditorsdeclined to give the green light to 37 financial state-
ments by listed companies for 2018, a 68% increase
from a year earlier, according to the Korean Financial
Services Commission. The rise in rejections comes as
South Korea takes more steps to ensure that auditors
have independence from companies that hire them,
along with heavier penalties in cases of fraudulent
accounting. This is certainly a step in the right direc-
tion and will be especially important in the event of
an economic downturn.
Economic growth is expected to slow to 2.4% this
year, but this still does not take account of a pro-
longed US-China trade war. Necessity and hard-
ship from shifting geopolitical factors, much like the
Asian Crisis of 1997, could be a blessing in disguise for
South Korea to once again re-invent itself and push
through needed reforms. FSOUTH KOREA GETS CAUGHT IN
CROSSFIRE OF US-CHINA TRADE WAR
MONEY & MARKETS RAINER MICHAEL PREISS
RAINER MICHAEL PREISS SERVES AS PORTFOLIO STRATEGIST AT TAURUS FAMILY OFFICE AND IS THE CO-FOUNDER OF THE BLOCKCHAIN AND CRYPTO ASSOCIATION OF SINGAPORE.ADOBE STOCK