Korea Strategy:Presidential scandal and new cabinet

Event

Over the past few days, a political scandal engulfing President Park has beenthe main topic for local press reports. On 2 November 2016, President Parknamed Kim Byong-joon (a former senior presidential secretary during formerpresident Roh Moo-hyun’s administration) as the new prime minister and YimJong-yong, the chairman of the Financial Services Commission, as the newfinance minister and deputy prime minister.

Impact

We do not expect major impact on financial markets: Historically, mostvolatilities from political events (incl. military tension with N. Korea) turned outto be good buying opportunities. In March 2014, lawmakers voted to impeachformer president Roh Moo-hyun. The KOPSI was down 6.3% during the weekbut rose 8.3% in a month. In November 2010, N. Korea bombardedYeonpyeong Island, which caused four deaths (incl. two civilian deaths). TheKOSPI was down 0.86% for two days. In December 2011, N. Korea leaderKim Jung-il passed away. The KOSPI was down 3.4% on the news but wasup 6.5% in a month.

Some people may say this time is different: The Macro environment remainspoor and the outlook for corporate earnings does not look bright. In addition,restructurings for shipbuilders and shippers are in progress. Hence, somemarket participants may argue that the political scandal could meaningfullyaffect financial markets this time. However, we think political influence (includingthe government’s policies) on the economy and corporate fundamentals hassignificantly decreased and this time should not be different.

New prime minister and new deputy prime minister (& finance minister):We think it is an interesting combination. The prime minister nominee used towork for former president Roh Moo-hyun’s administration (i.e. the currentopposition party) and the deputy prime minister nominee was the first FSCchairman appointed from the private sector. We believe Mr. Yim has been oneof the best chairmen of the FSC and has significantly changed Korea’sfinancial watchdog’s stance toward financial institutions.

Sectors or stocks which could be volatile for the time being: First, wethink it is inevitable to see significant lame-duck phenomenon. Hence, sectorswhich are dependent on the government’s policies and budget execution(defence, infrastructure, etc.) could be volatile for the time being. Second, Mr.

Yim said he would take serious measures on property bubbles, which couldnegatively affect investor sentiment on construction-related sectors. Third, aswe think Mr. Yim has meaningfully changed the FSC’s stance toward financialinstitutions (positively), his departure could create negative sentiment onfinancial institutions. Lastly, due to political noises and the expected lameduck, we think it may be difficult to see key progress in shareholding structurereshuffling for a few chaebol groups.

Outlook

Given the continuous noise on the presidential scandal, market volatility maybe inevitable. However, we would recommend investors use any meaningfulcorrections as opportunities to accumulate our top picks; SEC, KB FG, HFG,HM&F, Hyundai Motor, Lotte Chem, and NAVER.