US dollars and dollar-denominated assets have long been regarded as safe assets, along with their Japanese equivalents. Given the lack of growth witnessed in emerging markets and the growing uncertainty in the major economic blocs, dollar-denominated assets should be the main focus of investment for the next two to three years.
Regardless of the return on investment on a local currency basis – whether it’s an equity investment or a real estate investment – in US dollar terms (the absolute perimeter recommended), the currency risk is unavoidable. Regardless of Trump’s insistence on aiming for a weaker dollar against major currencies, the Fed’s existing pledge to raise rates on a quarterly basis, and the inability of Japan, the EU, China, and South Korea to follow suit will serve as a major discount factor.
Risk Crosses the East Asia Region
This is especially true in China and South Korea owing to the surge in household debt (primarily mortgage debts) and excess housing supply in their real estate markets, so these two countries would require more caution from those looking to make a new investment. In fear of a meltdown, there is a clear limit as to these two nations’ ability to match the Fed’s rate increases.
A realisation of the bad debt on the part of the real estate market would be a more fatal blow to South Korea than to China in this context. Yet rating agencies have behaved far too naively thus far, with Moody’s only revising the top five non-state-owned banks five-year outlooks’ downwards last April. It is no coincidence that the Korean government is actively encouraging dollar savings accounts (which lie outside the remit of national deposit insurance) to the public in a desperate attempt to ease the strain on non-state-owned banks.
Could Korea Witness a Bank Run?
The traditionally strong orientation towards consumer banking of most non-state-owned financial institutions, acting as mere pawnshops and having an absence of solid risk management mechanisms, may lead to an actual bank run. Sources at Shinhan Bank have mentioned an internally anticipated bank run by the third quarter of 2018, due to the easy mortgage credit offered up until November 3rd of 2016 under ‘government guidance’ prior to the clear downturn in the real estate market. This failure of poorly designed government policy on sustaining the economic growth by flooding easy credit in the sinking real estate market proving itself as a sure recipe for a disaster.
This failure of poorly-designed government policy on sustaining the economic growth by flooding easy credit in the sinking real estate market proving itself as a sure recipe for a disaster.
There is an already growing concern that there will be a nationwide default on mortgages closely resembling the subprime mortgage crisis in 2008. Even the blind real estate investment into South Korea from mainland China – which has rapidly expanded to account for 44% of the 1.1% of land in Jeju Island that is owned by non-Koreans, according to a May 2016 announcement by the Ministry of Land, Infrastructure, and Transport – has halted.
Korea: A Negative Outlook
With the political risk involved as progressive candidates ascend towards the presidency in the election this year, in the aftermath of the ongoing political corruption scandal, with their strong anti-globalisation, anti-market economics, anti-West rhetoric, and their pledges to increase property taxes to eliminate ‘rent-seeking behavior’, it’s increasingly difficult to draw up a positive outlook for Korea in the coming years.
Sooner or later, South Korea will undergo a major economic crisis of a greater magnitude than what was witnessed in Japan in 1990s. Coupled with external circumstances, the ongoing political crisis, and the risk of a far-left leadership, it is already an irreversible path. Should one have any assets to clear in Korea, it would be best to do so before it’s too late – and should one have any excess funds, it would be best to invest in the US or Panama.