Lee Jay-Keung has one big advantage in that his party controls parliament and he is president. But he faces many daunting challenges that he does not control:
1. The economy is 87% international trade. If US 25% tariffs are imposed it will plunge into recession. Exports to the US alone make a 6-8% contribution to GDP. The domestic economy is flat on its back. Reciprocal tariffs would cut back Korea’s exports to other EMs (e.g.China). It is unlikely that the mooted Korean fiscal package will be big enough to change this much. Tariff- induced recession was not even a topic in the election.
2. the country is so split and polarised it will take years of successful policies to heal.
3. it will be very hard for Lee to agree to pay for US defence as a part of any deal with the US or to accept structures on Korea’s relationship (including trade) with China. This will be made worse if the rumoured US troop cuts materialise even if they are not militarily significant.
4. we still have to see if Lee reverts to his old pro China and detente with Pyongyang alternative vision to the Japanese and US alliance to contain China. I am not convinced by Lee’s softened tone during the election campaign . The outcome could be influenced by the US attitude during trade negotiations
. 5. lurking in the background is what will happen if President Trump decides to embrace Kim Jong Un again? The issue of S. Korea going nuke is still there even if the debate is about building a nuclear sub with conventional weapons (! )
At a historical P/E of 11, Korea is trading at about the middle of the range since 2005. The P/E could rise as earnings fall as i expect. Korea always looks cheap compared to peers. But then the discount is warranted by factors such as the Chaebol and South Korea's precarious gepolitcal position
For the momen, at the risk of missing the early bird premium, I want to see what happens on the Korea -US trade front first.