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Under the Banyan Tree - Asian tariffs in perspective
744 Plays22 days ago
Herald van der Linde sits down with Economist Jin Choi and Equity Strategist Prerna Garg to discuss the future of Korea's economic and corporate landscape under the presidency of Lee Jae-myung. Disclaimer https://www.research.hsbc.com/R/101/WcHxmzl.
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Transcript
HSBC Global Viewpoint Overview
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:24
Speaker
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Impact of South Korea's New President
00:00:45
Speaker
Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm your host, Harold van der Linde, head of Asian equity strategy at HSBC. Well, the votes are in and South Korea has a new president.
00:01:00
Speaker
Lee Jae-moon will be the country's next leader after months of political turmoil. What does that mean for the macro and the micro landscape? Joining me to help answer those questions are Korea economist Jin Choi and Asia equity strategist Brenner Gag.
00:01:15
Speaker
Let's get the conversation started under the banyan tree.
00:01:33
Speaker
Let's start with a bit of background on the new Korean leader. Lee Jae-myung is an altogether different figure Korean politics from many of the leaders that we've seen in the past. He doesn't come from a rich and powerful family. He worked his way up from humble beginnings to become a civil rights lawyer before in going into politics.
00:01:52
Speaker
Perhaps most notably, his views are largely seen as progressive compared to past Korean leaders. So we're going to look at the future of Korea, very important economy in North Asia.
00:02:04
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And with that, I think the way to approach this maybe to look at it from the top down with our economist, Jin Choi, but also from the bottom up, looking at how corporates are behaving with my fellow strategist, Pruna
Economic Challenges in Korea
00:02:15
Speaker
Gag.
00:02:15
Speaker
So Pruna, Jin, thanks for coming on to the podcast. Thanks for having us here, Harold. Thank you, Harold. Good. So, Jin, let's kick off with you. We're looking at the top down. So how is Korea going to look like over the next couple of years?
00:02:29
Speaker
Sure. Let me start off with the near-term implications of the um presidential election. Yes. um So now the big story in Korea is that growth is really bad this year. A lot of people expect the growth will be below 1%, which is unusual in Korea standard. Hmm.
00:02:44
Speaker
um Now, what's been weighing on Korea's growth this year is that the domestic demand has been very slow to recover. People are not spending too much money. Exactly. I'm talking about household consumption. I'm talking about corporate investing, right?
00:02:55
Speaker
And then this is despite the Bank of Korea cutting policy rates in order to help stimulate that, right? Yes, correct. Now, the main corporate sentiment has been very weak amidst the very well-known political turmoil, domestic political turmoil, yeah Because Korea is an exporting country, right? So all the talk about tariffs, that really hits Korea pretty hard, right? The automakers here. Correct. So um export is on a weak standing at the moment, which is rather expected given all the tariff noise coming from um the U.S. side, right?
00:03:26
Speaker
But then what's been concerning domestically is that the domestic demand, as I was mentioning, has been very slow to recover. Mm-hmm. Now, this is in a way a formal ending of the um political uncertainty that was weighing on ummb households and the corporates domestically. Yeah, because we've had quite a roller coaster in politics in Korea, right? There's been this whole impeachment process and correct the martial law issues. Yes, we we all love K-dramas and K-movies. But my friends have been telling me that Korea politics has been more much better than that. even Exactly, right exactly.
00:03:58
Speaker
Yes. So that's that's a big takeaway. Number one is that removal of potential removal of um political uncertainty could potentially lead to recovery in sentiment and help pro provide some boost to um domestic demand recovery in the second half.
00:04:11
Speaker
ah The second quick implication is to see a swift shift in physical policy towards it becoming more expansionary. More spending. Exactly. Exactly.
Policy Proposals and Economic Stimulation
00:04:19
Speaker
So the President Lee Jamyung has already promised he'll pursue a second extra budget that's going to be 35 trillion Korean won or more.
00:04:29
Speaker
To ignite that economy a bit further because the experts are weak and people are worried about spending, right? And he's been saying that that money will be going to boosting on consumption, especially for the um low-income households and also it's going to help um small merchants. not But if we look at Korea kind of in the longer run, you said in the beginning this is kind of the near term. So the political uncertainty has gone away. There's going to be more fiscal spending.
00:04:53
Speaker
and That's all nice and well. But in the longer run, Korea looks a little bit like Japan in sense. You've got an aging population. Something needs to be done about the demographics. On one hand, Korea competes with ah Japanese companies quite often that are technologically quite competitive. But on the other hand, on the cost side, it has the Chinese coming up as well, right? so How are they going to address
Demographic and Tech Policy Initiatives
00:05:15
Speaker
that?
00:05:15
Speaker
Right. So um the sense of um concern on Korea's corporate competitive edge globally has been rising. So if you look at what Lee Jae-myung has proposed for the election, he's been saying they'll increase um support for the and the new technology such as He's talking about formulating Korean 100 trillion size fund.
00:05:36
Speaker
that's got To set up and promote AI investments. Exactly. Korea has been a little bit slow in that front. They're normally on the forefront of technology, but it's been really kind of China and the US s that are the enemies at the moment, right?
00:05:47
Speaker
Right, right. So Korea's major semiconductor companies have been big on the related um memory chips. But then in terms of actual AI technology, he's been saying that we want to promote that ourselves as well.
00:06:00
Speaker
And now they're going to do something about the demographics as well, because that'ss that's a major issue. Korea has the lowest birth rate in the world. it's got but Yeah, exactly. Lowest birth rate in the world. It's aging. So what what can they do on that front?
00:06:11
Speaker
Right. So he has Lee Jae-myung has some um interesting ideas as well on the front as well. He's been talking about expanding childcare um support. He's been also talking about tackling the cost involved with nurturing your kids, such as education. Right.
00:06:26
Speaker
If you think about the um the root of course aging demographics issue. One of the things that's sometimes overlooked is the property market issues, right? yeah It's expensive. For me, that's a very interesting policy area, which had might have been a little bit missing in the campaign trail.
00:06:41
Speaker
The previous administration was well known for an aggressive regulatory approach to addressing Korea's housing market issues. So it'll be interesting to see how um the policy develops under Lee Jae-myung.
00:06:54
Speaker
um Just if I may add on just one more point, if you look at the National and Assembly, the current DPK, Lee Jae-myung's party has more than 170 seats out of 300. So he's got a majority. He's got the majority already. he can basically get his policy through.
00:07:09
Speaker
Correct. For most of the legislation, it just requires only half of the total, which is 150, which the DPK already has by itself. And then if you add other smaller liberal parties, which could be generally aligned with the DPK policy agenda, they have almost 190 seats out of 300, meaning they can fast track their bills to general voting.
00:07:32
Speaker
So they have a lot of leeway to go through. and and and get their policies through. So the picture that you give to me is that there is a political dynamic now that allows them to make some real big changes in Korea yeah with a focus on the birth rate and childcare and education, the housing markets.
00:07:52
Speaker
And in the near term, also simply stimulating the economy with consumer spending. So it could well be that a new sort of career starts to emerge over next couple of years from the top down. But I think, Pruna, from the bottom up, we're seeing changes as well. yeah You've looked at
Corporate Governance Reforms
00:08:05
Speaker
corporate governance changes. We have. ah So as you mentioned, with the new administration in power, it takes away a lot of uncertainties, not just for the economy, but even for equity market. Like, you know, investors have a lot of factors to look forward to. And one factor they're going to closely monitor is what it means for the corporate governance, what it means on the corporate governance. Because just to put in place, that's not been good in Korea. It's not. You have these large groups and where families sit on top.
00:08:30
Speaker
And in the past, they haven't really paid dividends and these sort of things. so It's not. So, like, you know, if I take a step back, Korean ah markets and as well as Japan within Asia, they're known as corporate laggards of the world.
00:08:40
Speaker
As you mentioned, there are multiple cross holdings within korearia So think of a tech company that is invested in pharma company, which in return has invested in mining company. it really does not buy yeah insurance companies it's owned by It really does not do very good for the profitability of the big conglomerate.
00:08:57
Speaker
um So because of this reason, Korean equities often trade at a discount to valuation. What I mean by that is an investor would be ready to pay much more for the unit earnings in Taiwan than they would do for Korea.
00:09:10
Speaker
And the government and the regulators in Korea, since many years, are trying to remove this discount. They're trying to ah to improve the corporate government's governance so that investors feel more excited about investing in the equity market. And one or two things that's so that we might expect that they're going to focus on? ah So ah Mr. Yoon's government, the ex-president, he had introduced, if you remember, something called the value up program in Korea. They wanted to motivate Korean companies to pay more dividends, to do more buybacks, so that foreign investors and domestic investors feel more excited about investing in the companies.
00:09:44
Speaker
but Because Korean corporates, they have been sitting on massive pile of cash instead of making massive investments. They generally take very conservative approach and they have a lot of cash on their balance sheet it and it brings down the profitability of the companies.
00:09:57
Speaker
This is because generally a member of the founding family takes decisions for the company and they take very cons conservative approach instead of really boosting the value of the minority shareholder.
00:10:10
Speaker
What Mr. Lee's government wants to do is they want to make some amendments, some changes in the commercial law. What they want to do is to make the board more responsible for the benefits of minority shareholders instead of just working for the founding family. Exactly. So instead of the family who runs the businesses, whatever they want to do, now they are going to be legally held discount and accountable to to listen to what minorities share. So if you see if it works in the right direction, this means that the board of the company would be doing what is right for ultimately the profitability of the company. This might mean they want to lessen the cash levels on the balance sheet by paying more dividends or by doing... but
00:10:51
Speaker
buybacks or they want to untangle the so-called ah noodle-like structures in the corporate system where they're just like, you know, a lot of these crossholdings which really don't boost the profitability of the companies.
00:11:04
Speaker
So, a market would be very closely looking at what type of policies comes out of Mr. Lee's government and as Jin mentioned that the current administration has a majority in the ah assembly.
00:11:16
Speaker
So ah they have much more power to go ahead with passing these regulations and making some changes in the corporate governance front. Fantastic. I suggest we take a quick break here and then see what that means for the Korean discount.
00:11:39
Speaker
So here we are, we've looked at Korea from the top down, from the bottom up. There seem to be a lot of changes. There's a bit of political will maybe to do so as well. The interesting question is Korea's always traded at a discount, as you said, Prerna, right?
00:11:52
Speaker
It's always been cheaper because people felt that they would, as shareholders, never be really taken care of and that there were longer term structure issues that might mean that domestic growth was not so fantastic.
00:12:04
Speaker
And if this is going to be addressed, it could well be that this is going to be a big theme for the market. Now, how quickly that will be addressed, the untangling or of these noodles, as you mentioned, right, that will take years and years, of course, to to materialize.
00:12:17
Speaker
It can be a really slow process, because if you remember, Japan has been trying to do it for a decade, you know, a yes, it's going in the right direction. Yes. companies are divesting the stakes from the unrelated businesses, they're paying more dividends.
00:12:31
Speaker
Ultimately, it boils down to does it improve the profitability of the company? And that can be a slow process.
Future Prospects for Korea
00:12:37
Speaker
But at the same time, if investors see if some progress is being made in this direction, it just reignites the interest of investors in investing into a particular market. So more progress on this front can really do this magic because like you know in the last few years foreign investors have been reducing their positioning on Korea they've been reducing their exposure so this can really reignite the lost interest in Korean equity market. Yeah and Jin as a Korean how do you feel about that? Yeah as a Korean I'm in a way a little excited as well. I can see he's all smiles. Every big endeavor has to have a start, right? And um I think Korea politics have ability to push through a lot of policy changes, which could be very beneficial for Korea, which is currently at the crossroads.
00:13:23
Speaker
um So against the and the long-term prospect of um slowing growth, aging demographics, the policy direction is becoming all the more important. So let's just conclude everything.
00:13:36
Speaker
The political constellation in Korea is kind of unique at the moment that some really big and long-lasting decisions can be made. From a macro point of view, it means that they can deal with some of the more pressing issues such as demographics and fiscal spending and also maybe income inequality in the country.
00:13:54
Speaker
And from a more micro point of view, it means that they can really address some of the kind of entangled crossholdings that are such a a particular phenomena in in Korean business life.
00:14:05
Speaker
um A new career might well emerge out of this so it's going to be an interesting sort of market to look at over the course of next couple of years and no doubt we're going to ask Pruna and Jin to come back to comment on this in the future.
00:14:20
Speaker
Well, that's all we've got time for on today's episode. Thanks as ever for joining us. Under the Banyan Tree is a HSBC global research podcast out every week. So is our sister podcast, The Macro Brief. So do give a listen to that one too.
00:14:33
Speaker
We'll be back again the same time next week. Talk to you then.
00:14:58
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.