How the South Korea-Japan Summit Could Ease Market Tensions in the Region

By November 29, 2019 General
South Korea-Japan Tensions, Shinzo_Abe,_Moon_Jae-in,_Pence_in_Pyeongchang (1)

The trade spat between China and the US and its fallout has dominated news headlines and the markets for more than a year now. But there are other, smaller conflicts happening in Asia that can have significant impact on stocks and investors. The Hong Kong protests is one; the South Korea-Japan conflict is another.

We won’t go into the details of the conflict’s roots and history as it goes back decades, all the way to World War II – Reuters has a good explainer. But for now, suffice to say South Korea-Japan relations have always been rocky, and every now and then, things come to a head. This is one of those times.

The spat has led to a trade war that has seen multiple industries affected in both countries, including food & beverage, automotive, and electronics. On top of that, South Korea threatened to pull out of GSOMIA, the General Security of Military Information Agreement, although President Moon Jae-in ultimately stepped back from the brink.

Now the stage is set for a South Korea-Japan summit in Chengdu, China in December, where President Moon will sit down with Prime Minister Shinzo Abe and the two sides will try and heal the rift between them. What comes out of the summit is anyone’s guess at this point, which is why Douglas Kim ventured a few possible scenarios in a recent Insight on Smartkarma.

Read Douglas Kim’s full Insight: Five Scenarios Post Moon & Abe’s Meeting at a Summit in China Next Month

In Talks

Kim went through the past history of the two countries and explored factors that can potentially affect the outcome, such as South Korea’s upcoming National Assembly elections and the role of China.

Based on that, he outlined five potential outcomes:

  • Abe and Moon make up and drop hostilities
  • Abe and Moon make no progress in South Korea-Japan relations and the current rift continues
  • The opposition Liberty Party of Korea (LPK) wins the upcoming election and compels President Moon to scale back the hostile stance against Japan
  • The governing Democratic Party of Korea wins the election and restores good South Korea-Japan relations
  • LPK wins the election and maintains the current dynamic of hostility

Regardless of what ends up happening, Kim is optimistic that the ice is thawing between the two governments. “The political rhetoric between them has softened now as compared to the July/August period, when political hostility between the two countries [was at its most extreme],” he says.

This should be good news for several Korean and Japanese companies whose stocks have been affected by the crisis. Kim lists some of the most important ones in his Insight: The Korean side includes names like Samsung Electronics, SK Hynix, Naver, Lotte Holdings, and Hotel Shilla. On the Japanese side, he lists, among others, Panasonic Corp, Asahi Group Holdings, Canon Electronics, Honda, and Japan Airlines.

Kim notes that his analysis leans towards the South Korea-Japan rift slowly healing by early summer of 2020, right before the Tokyo Olympics, which should be a boon to all those stocks.

Hotel Shilla: a Stock that Could Benefit from Easing Tensions

As an example, Kim uses Hotel Shilla to illustrate the impact of the situation on the firm, but also the opportunity therein. Despite what the name suggests, the firm generates the vast bulk of its sales via its duty-free shop business, being the second largest operator of such outlets in Korea and the third-largest globally. The rest of its sales come from its hotel chains, Hotel Shilla and Shilla Stay.

Read Douglas Kim’s full Insight: Hotel Shilla – A Beneficiary of the Thawing Relationship Between Japan & South Korea

Kim is bullish on the stock, as the firm’s operating margin on its hotel and leisure business unit “improved materially to 5.0 percent in the first nine months of 2019, up from 2.7 percent in the first nine months of 2018,” he writes. The growth came from a strong influx of overseas tourists into South Korea, as well as domestic tourists opting for the Shilla brand.

Much of the tourist traffic comes from China, as the Chinese government started allowing its citizens to travel to South Korea again after a rocky period between the neighbouring countries in 2016-2018. An easing of the South Korea-Japan tensions could have a similar effect to tourism from Japan.

If trends like current industry consolidation in Korea’s duty free shop market and tourism recovery continue, Kim sees a potential upside of more than 30 percent over the next six to 12 months. While the stock is almost 35 percent down from its mid-2018 heights, he believes it’s because it’s oversold due to political risks like the South Korea-Japan tensions and the Hong Kong protests, as well as excessive marketing costs to attract Chinese tourists.

Lead image by S. Herman (Voice of America)

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