Investors gauge fallout from crises in Paris and Seoul

South Korean stocks have had a turbulent week following President Yoon Suk Yeol's dramatic and short-lived attempt to impose martial law on the country. 

The surprise declaration on Tuesday led to troops entering the National Assembly amid clashes between police and protesters. A total of 190 lawmakers eventually made it into the 300-seat building and unanimously voted to block the move. 

“President Yoon’s martial law declaration represents a spectacular misstep,” says Jonathan Pines, Head of Federated Hermes Asia ex-Japan Equity. 

“It may have been a misguided attempt to counter the personal, political and legal challenges he has been facing. But it appears he may not have understood the legislative process behind such a declaration and the fact that his proposal could be immediately voted down. I would be very surprised if he survives this, and it’s likely he will be forced to resign.” The government lost its majority in the National Assembly in April and has subsequently struggled to pass any significant laws. Pines adds that one of the possible outcomes from this event may be that Yoon’s resignation begins the process of new presidential elections in South Korea. 

The government launched a corporate governance reform programme in February that seeks to address the so-called "Korea discount" (whereby domestic companies have tended to trade at lower price-to-earnings multiples than their global peers). Many investors will be watching closely to see how the recent events affect future policy implementation. 

“The country’s legislature has been constrained by the fact that President Yoon’s ruling People Power Party does not have a majority in the National Assembly.  If the outcome is that a new president is elected with the support of a majority in National Assembly, it could smooth the passage of future legislation,” he says.

France in turmoil

Elsewhere, France has been plunged into political crisis after a no-confidence vote brought down the country’s minority coalition government after only three months. French Prime Minister Michel Barnier resigned on Thursday following the vote. 

“The political turmoil in France has significantly impacted its sovereign fixed income market, with most of the spread moves so far happening earlier in the year,” says Orla Garvey, Senior Fixed Income Portfolio Manager at Federated Hermes Limited. “In this latest bout of volatility, sovereign spreads have remained largely contained around previous highs.”

The result of French parliamentary elections in July led to a hung parliament, with no one group able to govern alone.  

The yield on the French two-year sovereign debt had risen to 2.2% at 16:30 on Thursday. It reached 3.2% in mid-June this year. Meanwhile, the yield on the 10-year government bond stood at 2.9%, the same level as the equivalent bond issued by Greece. 

A new French prime minister will need to be appointed in the coming days. It’s likely, however, that the current precarious situation of weak minority government will persist into the next summer's parliamentary elections, Garvey says.

“The political volatility in France is weighing on sentiment and clearly visible in recent purchasing manager indexes (PMIs), this likely continues to weigh on the growth outlook and creates difficult conditions in terms of meeting budget goals which likely keeps spreads under pressure,” Garvey adds.

“The current turmoil in France is occurring within a broader context of heightened political volatility. This widespread instability is significantly impacting markets by creating uncertainty around growth and inflation outlooks, deficit trajectories, and future issuance needs. This trend is likely to continue into 2025.”