Declining markets defy government intervention in Taiwan, Korea

(Bloomberg) — South Korea and Taiwan, two tech-heavy economies in Asia, are facing an uphill battle trying to stem losses in what are already among the world’s worst-performing assets this year. They are hit particularly hard by slowing global growth and US chip restrictions.

Most Read From Bloomberg

The authorities are ramping up measures, including imposing limits on short selling, preparing market stabilization funds to buy assets and intervening in currency markets in moves reminiscent of the early days of the pandemic. Korea resumes corporate bond buying as yields rise and default risk spreads.

While markets everywhere have seen painful moves in response to accelerating inflation, soaring central bank interest rates and a soaring dollar, South Korea and Taiwan appear to be particularly vulnerable among the major economies. Both rely heavily on exports for growth, and are affected by global demand for chips. To make matters worse, the impact of new US restrictions on the supply chains associated with China’s semiconductor industry.

Interventions did not stop the declines. Taiwan’s stock index has fallen about 8% since the support fund was activated in mid-July, and Korean stocks have fallen 11% in the past two months, leaving stock metrics in both markets down more than 25% this year. The Korean won and the Taiwan dollar are among the world’s biggest losers against the US dollar so far.

“These stabilization measures are intended to buy enough time for the technology cycle to drop and foreign investors to return,” said Wai Ho Leung, strategist at Modular Asset Management. “Changing markets is different.”

Chip Well

Amid these headwinds, analysts cut their earnings estimates for Korea’s SK Hynix and Samsung Electronics Co. to their lowest level in more than two years.

While the chip makers have won approval from the United States to continue ordering American equipment for their factories in China for one year, concerns revolve around their business models as the United States seeks to limit China’s self-sufficiency and advances in military capabilities.

The recession environment in the West and China’s Covid Zero policy also have spillover effects. Taiwan’s central bank warned of “serious economic challenges” in 2023, while South Korea posted its longest streak of trade deficits since the Asian financial crisis.

“In the near term, we remain cautious about Asian stocks – particularly stocks or equity markets exposed to external growth – such as Korea” and tech hardware companies, Nomura Holdings Inc strategists including Chetan Seth wrote in a recent note. . Samsung and Taiwan Semiconductor Manufacturing Company represent the largest weights in the Kospi and Taiex indices, respectively.

Bond blues

Korea’s resumption of a $1.1 billion bond stabilization fund, which was announced just a few weeks after a rare commercial paper default by developer Legoland Korea theme park in Gangwon Province, may have limited impact as the market as a whole is much larger, and returns continue to rise. . However, the fund may prompt others to follow suit if credit markets remain weak.

“Korea may only be the first in a series of credit interventions in Asia amid rising risks of financial accidents,” DBS Group Holdings Ltd strategic analysts including Chang Wei Liang and Philip Wee wrote in a note.

Korea and Taiwan are not alone in supporting the markets. Japan intervened in the currency market to stem the yen’s decline, but failed to prevent the currency from falling to a 32-year low. China is easing restrictions on mutual fund purchases to support a battered stock market.

‘long winter’

Undoubtedly, the decline in valuations in Korea and Taiwan is proving attractive to some, and may lead to higher prices in the short term. Foreign investors have been snapping up Korean stocks for 13 days in a row this month, and Morgan Stanley is among the outliers calling for an end to the underperformance of Asian technology stocks as it sees most of the risks being priced in.

Others remain skeptical that export-dependent economies will rebound any time soon, and some prefer Asian markets buoyed by strong domestic demand and a boom in tourism such as India and Indonesia.

“It’s going to be a long winter – these support measures probably won’t be enough,” said Ken Ping, head of investment strategy for Asia at Citigroup’s private banking arm, referring to the measures taken by the Korean and Taiwanese authorities. “Recovery will likely wait until the US dollar tops and pulls back, most likely when growth outside the US is expected to recover.”

– With the help of Youkyung Lee, Hooyeon Kim, Betty Hou, Catherine Bosley and Abhishek Vishnoi.

Most Read From Bloomberg Businessweek

© Bloomberg LP 2022

Leave a Comment