But barring a broader conflagration the
turmoil is unlikely to spark a slump in South Korean assets due
to the countrys robust economic fundamentals, analysts
We see a strong chance of further a pullback in the
Korean won and stock market in the days ahead as more details
about the incident emerge, particularly if public opinion in
South Korea puts pressure on the government there to take a
stronger stance, said Brian Jackson, a Hong Kong-based
analyst with RBC.
But South Koreas positive growth outlook and
strong external position boosts the medium-term market outlook
in South Korea.
The Korean won lost 2.5% following reports that North Korea
fired artillery at South Koreas Big Yeonpyeong island in
the Yellow Sea, prompting reprisals from the South.
Indias benchmark 30-share index, BSE Sensex, closed 1.3%
Hong Kongs Hang Seng Index dropped 2.67% in reaction
to tensions in the Korean peninsula. Asian markets were also
rattled by concerns that other European nations may need
financial support, following Irelands emergency bailout
package this week.
Alastair Newton, senior political analyst at Nomura, said
Tuesdays flare- up is potentially one of the most
serious incidents that we have seen in the region for many
years coming in the wake of the sinking a South Korean
warship in March.
But he said South Korea has enough policy bullets to head
off a market slump. Korean business and consumer sentiment
could take hit if tensions escalate further, but a weaker
currency would boost the countrys export competitiveness
and trade balance, he added.
The Bank of Korea has a record stockpile of $293 billion of
foreign exchange reserves, which provides the authority with
sufficient ammunition to provide emergency liquidity for
financial markets. In addition, the BoK could restart currency
swaps with the US Federal Reserve in the event of a dollar
Deputy governors of the Bank of Korea and government agencies
will hold an emergency meeting Wednesday to discuss the market
impact of regional tensions and possible policy responses, the
finance ministry has said. South Koreas Financial
Services Commission and Financial Services Supervisory Service
has also said regulators can take pre-emptive measures to
forestall a further market sell-off.
Jackson said the tensions did not change a positive outlook on
Koreas currency. Dips in the wons value
which Jackson said is currently undervalued by between 10% and
20% offer investors buying opportunities, he said.
South Korean assets already have political risk premia
priced in while appreciation pressures on the Chinese
yuans will strength the won.
South Koreas government could scrap capital inflow taxes
in the event of sell-off in Korean assets, said Newton. Before
today's incident, the government was poised to reinstate a
14% tax on interest income from treasury and central bank bonds
and an initial 20% capital gains levy on their sale in the
primary markets. The moves are intended to curb foreign inflows
of capital to stem currency appreciation pressures and the
risks associated with excess financial leverage.
South Korean markets last sold off on May 20 as regional
tensions flared following an investigation which concluded that
a North Korean torpedo had sunk South Koreas ROKS Cheonan
navy vessel in March. This led to a 9% drop in the Korean won
against the US dollar in the days following the report.
Newton said it remains unclear whether Tuesdays
incident represents an attempt by the North Korean leadership
to gain leverage over the international community or if the
attack was undertaken by rogue military commander.
In recent weeks, rumours have surfaced North Korea is
preparing a nuclear test while at the same time looking to
return to the negotiating table with world powers over its