By Craig Mellow
If you believe in the TACO trade, South Korea's market may have more legs.
For someone who just won a landslide (by local standards) election victory, with control of Parliament to boot, incoming president Lee Jae-myung sounded less than exuberant in his June 4 inaugural address.
His nation of 52 million people faces a "tangled web of overlapping crises," Lee declared, which will demand "unimaginable sweat, tears, and patience."
The most immediate crisis emanates from Seoul's self-professed ironclad ally, the U.S. Korea is one of the most vulnerable countries to President Donald Trump's trade offensive, exports across the Pacific amounting to 7% of gross domestic product. (China's figure is less than 3%.)
Korea sells even more to China, limiting Lee's wiggle room to team up with Washington at Beijing's expense. Lee isn't exactly Trump's kind of guy either, a left-leaning ex-governor who once aspired to be "a successful Bernie Sanders" and pitched universal basic income in his first presidential run in 2021.
Korea still has good chances of persuading Trump to moderate his threatened 25% "reciprocal tariffs," says Wendy Cutler, a veteran U.S. trade negotiator who is now vice president of the Asia Society Policy Institute.
The country was the top foreign direct investor in the U.S. in 2023, led by chaebol giants Hyundai Motor and Samsung Electronics. Korea is the only viable alternative to China as a partner in strategic industries like shipbuilding, which both the administration and Congress have flagged as a U.S. priority. Not to mention that Trump himself signed a free-trade pact with Korea in 2018.
"I think the talks have been making a lot of progress," Cutler says.
Lee has tilted pragmatic in his quest for power, jettisoning universal basic income and qualifying his Democratic Party's traditional dovishness on North Korea.
"He's a politician first, not an ideologue," says Darcie Draudt-Vejares, a fellow in Korean studies at the Carnegie Endowment for International Peace.
Assuming he avoids a trade cataclysm, Lee looks well positioned to improve the awful corporate governance regime that has driven a deep "Korea discount" on stocks, says James Lim, a partner at Dalton Investments.
Democratic Party legislators passed a revision this spring of the Commercial Act that included a fiduciary duty of corporate directors to shareholders. An acting president from the conservative People Power Party vetoed it. Lim expects a stronger bill to pass soon, adding investor-friendly features like separate elections for audit committee members.
"On the corporate governance front, this is one of the best periods so far for Korea," he concludes.
South Korea, which is still classified as an emerging market despite income per capita on par with Japan or Spain, may well "graduate" to developed market status over the next year or two, another bull indicator. It has steadily addressed objections from index gatekeeper MSCI, from a short selling ban to limited hours for currency exchange.
"We see a very high possibility of being included [in developed markets] soon," Kim So-young, the vice chairman of the Financial Services Commission, said in April.
With these perspectives, Korean stocks still look cheap at an average of 0.9 times book value despite a 25% gain in the iShares MSCI Korea exchange-traded fund this year, Lim says.
"We were very heavily invested in Korea and have not reduced any of our positions," he says.
If the TACO pattern holds, that looks like a decent bet. If not, Lee could be in for that unimaginable sweat and tears.
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(END) Dow Jones Newswires
June 06, 2025 21:31 ET (01:31 GMT)
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