South Korea's new president, Moon Jae-in, hasn't been messing around. He immediately suspended production at old coal-fired power stations, part of broader corporate reforms he's likely to push. And now he has suspended the deployment of the U.S. missile defense system that has caused so much angst.
The missile system that is known as THAAD -- for Terminal High Altitude Area Defense -- is in place to block threats from North Korea, which blasted off several cruise missiles today for good measure. But it has raised the hackles of China, which believes THAAD can be used to spy on its military movements and shoot down its missiles, too.
A buyer boycott of Korean retailers and other companies with operations in mainland China ensued, as did a big slowdown in Chinese tourism to Korea. China is the top source of travelers to South Korea, but arrivals fell by two-thirds in April after Beijing on March 15 banned tour groups from making the trip.
The suspension of the THAAD program is therefore good for companies such as the Lotte group, which sold an abandoned golf course to the government that became the site of the missiles. Its department store wing, Lotte Shopping KS:023530, is one of its many listed entities.
Korean stocks are just off all-time highs, some of the star performers in Asia. But they're still cheap to Société Générale, which notes they trade at around 10x earnings and 1x book value. In SocGen's view, the gains reflect better earnings but no re-rating of companies that suffer from the "Korea discount" caused by poor corporate governance.
China's economic retaliation hit consumer stocks and those linked to Chinese tourism and exports. SocGen has compiled a basket of THAAD-linked stocks. That basket includes companies such as Korean Air Lines KS:003490, department stores such as Shinsegae KS:004170 and Hyundai Department Store KS:069960, and hospitality companies such as Hotel Shilla KS:008770.
All are worth watching now that THAAD is on hold. Throw in casino operators Grand Korea Leisure KS:114090 and Kangwon Land KS:035250 for good measure. Korean casinos are only open to foreigners, China being the main market. Kangwon actually operates the only casino open to Korean citizens, in a remote abandoned mining area. It's wildly popular.
The most actively traded "THAAD stocks," with average daily volumes of $35 million or more in Korea, include some well-known names. Hyundai Motor (HYMTF) leads the list, which also includes Kia Motors KS:000270.
Cosmetics company Amorepacific KS:090430 would be a particularly obvious play because Korean fashion, thanks to K-Pop and omnipresent soap operas, is wildly trendy in China. There are other listed but smaller cosmetics makers such as Korea Kolmar KS:161890, LG Household & Health Care KS:051910 and Cosmax KS:192820.
LG Chemical KS:051910, which makes chemicals that go in common commodities, is also very actively traded and a THAAD stock. Auto-parts maker Hyundai Mobis KS:012330 and Korea's main cigarette maker KT&G KS:033780 are other active stocks in the THAAD basket and likely to get a boost.
Moon is making friends with China with the thud to THAAD. He's also placating the business community and his political supporters, according to Stephen Nagy, a professor of international studies at International Christian University in Tokyo.
Moon is also making conciliatory noises about talks with South Korea's belligerent northern neighbors; neither any resumption of such a "Sunshine Policy," which also favors closer relations with China, nor the rejection of U.S. missiles is going to go down well with President Donald Trump.
Precisely what the missile delay does to U.S.-Korea relations remains to be seen.
An official from the Blue House, Korea's official residence, said two launchers that have controversially already been installed can remain. But four more launchers yet to be deployed won't be set up until the administration can complete a necessary environmental assessment, an issue that bothered literally nobody up until now.
Moon's election was most welcome in Korea because it ended seven months of unsettled politics surrounding the impeachment of his predecessor, as I explained when he took the vacant office immediately after election.
The suspension of THAAD, closer ties with North Korea, expected active fiscal easing and chaebol reform are all positive forces for Korean stocks, in SocGen's eyes. The move to shutter the coal plants was a decisive first step, as I explained in mid-May.
Korea is stuck in a middle ground between a developing and developed economy. It is as of 2009 a "developed market" in the eyes of FTSE Russell and its stock in indexes that track that provider. But it isn't in the eyes of MSCI and its index trackers, which put it in the "emerging market" box.
It is chaebol reform that would lead to a true re-rating of Korean companies. Besides THAAD stocks, I indicated earlier this week how investors can play Korean stocks through the smart purchase of companies with large amounts of preferred stock, which trades at a large discount to common stock, and also Treasury shares, held by the company but that it can cancel.