Plunging Markets Defy Government Intervention in Taiwan, Korea

(Bloomberg) — Asia’s two tech-heavy economies, South Korea and Taiwan, face an uphill battle to contain losses in what is already among the world’s worst-performing assets this year. They have been hit particularly hard by a global slowdown and US chip restrictions.

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Authorities are stepping up actions including introducing restrictions on short selling, preparing market stabilization funds to buy assets and intervening in foreign exchange markets in moves reminiscent of the early days of the pandemic. Korea resumes corporate bond purchases as interest rates rise and default risk spreads widen.

While markets everywhere have seen heartbreaking moves in response to accelerating inflation, aggressive central bank rate hikes and a soaring dollar, South Korea and Taiwan appear particularly vulnerable among the major economies. Both rely heavily on exports for growth and are influenced by global demand for chips. Adding to their misery is the impact of new US restrictions on supply chains related to China’s semiconductor industry.

The interventions have not stopped the declines. Taiwan’s stock benchmark is down about 8% since a bailout fund was activated in mid-July, and Korean stocks fell 11% in the past two months, pushing stock prices in both markets down more than 25% this year. The Korean won and Taiwanese dollar are also among the biggest losers in the world against the dollar so far.

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“These stabilization measures are intended to buy enough time until the technology cycle bottoms out and foreign investors return,” said Wai Ho Leong, strategist at Modular Asset Management. “Turning the markets around is another matter.”

Chip Woes

Amid this headwind, analysts have revised their earnings estimates for Korea’s SK Hynix Inc. and Samsung Electronics Co. reduced to its lowest in more than two years.

While the chipmakers have secured US approval to continue ordering US equipment for their factories in China for a year, concerns swirl around their business models as the US looks to curb China’s self-sufficiency and advances in military capabilities.

A recessionary environment in the West and China’s Covid Zero policy are also having knock-on effects. Taiwan’s central bank warned of “serious economic challenges” in 2023, while South Korea recorded the longest run of trade deficits since the Asian financial crisis.

“In the short term, we remain cautious on Asian stocks — particularly in stocks or equity markets exposed to external growth — such as Korea,” and tech hardware companies, Nomura Holdings Inc. strategists, including Chetan Seth, wrote in a recent note. Samsung and Taiwan Semiconductor Manufacturing Company have the largest weights in the Kospi and Taiex indices, respectively.

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Bond gloom

Korea’s resumption of a $1.1 billion bond stabilization fund, announced just a few weeks after a rare commercial paper default by the developer of Legoland Korea theme park in Gangwon province, may have limited impact because the overall market is so large. is greater, and yields continue to rise. Still, the fund may encourage others to follow suit if credit markets remain weak.

“Korea may be the first of a series of credit interventions in Asia amid increased risks of financial disaster,” DBS Group Holdings Ltd. strategists including Chang Wei Liang and Philip Wee wrote in a note.

Korea and Taiwan are not the only ones supporting the markets. Japan intervened in the foreign exchange market to counter the yen’s decline, but failed to prevent the currency’s fall to its 32-year low. China is easing restrictions on mutual fund purchases to support the plummeting stock market.

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‘Long winter’

Certainly, falling valuations in Korea and Taiwan are proving attractive to some and could lead to ups and downs in the near term. Foreign investors have been buying Korean equities for 13 consecutive days this month, and Morgan Stanley is among the outliers to end the underperformance of Asian technology stocks as most of the risk has been priced in.

Others remain skeptical that export-dependent economies will recover quickly, with some preferring Asian markets supported by strong domestic demand and a revival in tourism, such as India and Indonesia.

“It’s going to be a long winter — these bailouts probably won’t be enough,” said Ken Peng, head of Asia investment strategy at the private banking arm of Citigroup Inc., citing actions by the Korean and Taiwanese authorities. “A recovery will likely have to wait for the USD to peak and turn, probably when non-US growth is expected to recover.”

–With help from Youkyung Lee, Hooyeon Kim, Betty Hou, Catherine Bosley and Abhishek Vishnoi.

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