How South Korea's stock boom sparked a currency crisis
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South Korea's wild markets are shaking the country's currency.
Why it matters: The swings in the South Korean currency, the won, illustrate how financial markets can create issues for the real economy.
Context: South Korea's stock market has exploded in recent months, thanks to AI-driven demand for chips made by the country's semiconductor makers.
- Through Thursday, the country's benchmark KOSPI index was up 105% since the start of the year, in local currency terms. (Roughly 90% in dollars.)
- Chip giant Samsung Electronics has nearly tripled over that period, and memory chipmaker SK Hynix is up over 250%.
Yes, but: That run-up attracted inflows from investors worldwide. Now, some foreigners appear to be taking their profits, or at least rebalancing their portfolios to avoid becoming too heavily concentrated in South Korea's highly concentrated market.
What they're saying: "Some outflows may be due to concentration limits among emerging market equity investors and could be consistent with [South Korean won] depreciation since end-October," JPMorgan analysts wrote Thursday.
How it works: As those investors liquidate their holdings and move their money out of the country, they sell South Korean won and buy other currencies, putting downward pressure on the currency.
The latest: South Korea's currency and government bonds have tumbled in recent days, with the government vowing action to curb "excessive volatility." On Friday, the stock market plunged too, adding to the pressure.
- Essentially, it's telling speculators that the government could intervene in markets to shore up the currency.
- That's an attempt to warn off investors tempted to jump on the bandwagon and bet on the currency falling further.
The bottom line: The plunge in the currency sits uncomfortably with South Korea's struggles to sustain its energy imports amid the Iran war, in an interesting illustration of how shifts in somewhat abstract investing sentiment can translate into the real world of commodities, energy costs and imports.
