[The Editors' Verdict] The Greatest Risk to the Capital Market Is the 'President'

Carpet Bombing of Financial Markets Amid Martial Law
Rising Political Uncertainty and Plunging Trust in the Capital Market
Korean Stock Market Needs to Overcome 'Political Risk' to See a Spring Revival

"The KOSPI is not an independent variable, but a dependent variable." A senior official in the financial investment industry recently lamented this when we met. The KOSPI inevitably gets affected by various factors such as economic recessions, but the prevailing atmosphere of blaming the market by focusing only on the 'result' rather than the 'cause' is regrettable. A dependent variable refers to a variable that is influenced by changes in independent variables.

In other words, the market is influenced by a complex interplay of various factors including ▲domestic economic factors such as interest rates, exchange rates, economic growth rate (GDP), and inflation; ▲corporate performance factors such as major companies' earnings, dividend policies, and investment plans; ▲international economic factors such as the U.S. stock market, oil and raw material prices, and global economic outlook; ▲foreign investor trends influenced by the strength or weakness of the Korean won; ▲government policies including fiscal policy, economic stimulus measures, and regulatory policies; ▲geopolitical risks such as international conflicts and North Korean risks; and ▲investment sentiment such as investor fear or optimism, all of which determine the direction and volatility of the KOSPI. It is ignorant to complain about why the market keeps hitting bottom or not functioning despite the government pushing corporate value-up initiatives from the beginning of the year. The current bottom of the KOSPI is due to Korea's fundamentals being weak because of complex factors. Even if the corporate value-up program succeeds, if other variables have a significant impact, the KOSPI may not respond positively.

President Yoon Suk-yeol declared martial law. On the morning of the 4th, when martial law was lifted by a resolution of the National Assembly, news related to martial law appeared on the monitor in the Hana Bank dealing room in Jung-gu, Seoul. Due to the impact of martial law, the KOSPI opened down 1.97%, and the exchange rate started at 1,418 won that day. Photo by Jo Yong-jun

So, what is the biggest risk to our stock market right now? Foreign capital has continuously criticized the Korean government's inconsistent capital market policies, such as the sudden ban on short selling, and now an unprecedented situation has occurred with the declaration of martial law. On the night of the 3rd, the sudden and unexpected declaration of martial law by President Yoon Suk-yeol bombarded the domestic financial market. The won-dollar exchange rate soared, and the value of Korean assets including the won plummeted. It rose to 1,440 won, and this sharp increase was a result of increased political uncertainty and weakened investment sentiment due to the martial law declaration. Virtual asset prices also plunged, causing panic in the coin market. Bitcoin dropped more than 30%, from 134 million won per coin to around 88 million won. Market volatility was also significant. The KOSPI 200 night futures options index fell more than 3%. In the New York stock market, a "Korea dump" unfolded. Korean-related stocks were swept by a sell-off immediately after the New York market opened, and the decline narrowed only after news of the lifting of martial law was announced. As such, the declaration of martial law is an extreme measure reflecting political and social instability, which has an immediate and significant impact on the market.

The declaration was sudden and was lifted after about two and a half hours, quickly resolving the martial law issue, but it deepened economic and political uncertainty and damaged the domestic and international image and credibility of the Korean capital market. This was a creation made by the president who poured special affection(?) into the market while promoting the corporate value-up program, all within just a few hours. How will responsibility be taken?

Since the KOSPI index began to be calculated on January 1, 1980, martial law has never been declared. It is impossible to predict future stock market changes based on past data. With scenarios such as impeachment unfolding and Korea’s unique political uncertainty intensifying, it is unknown how long the stock market volatility will continue. Although the government is responding to stabilize the financial market, restoring trust in the Korean capital market appears to be a very long journey. Korea’s fundamentals will be strengthened and trust enhanced only when advanced capital policies aligned with global standards are pursued without being shaken by political risks. When the capital market sheds its 'political risk,' the cold winter of the Korean stock market will end.

This content was produced with the assistance of AI translation services.