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Seoul: Stock woes deepen as new trade war with Japan roils market

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[SEOUL] Investors who have stomached the ups and downs of South Korea's stock market this year have just been dealt another blow: resurgent tensions with Japan.

A trade war initiated by Japan to curb exports of materials crucial for the production of memory chips has wiped out over US$35 billion in value from the Korean equity benchmark in July.

Investors sold shares in semiconductor makers amid rising concern that they will be the biggest victims of the dispute.

Japan's decision to tighten controls over exports to South Korea of special materials vital to its tech industry erased about 16 trillion won (S$18 billion) from Samsung Electronics' market cap. SK Hynix has shed 1.5 trillion won. Both Samsung and SK Hynix make up almost a quarter of the benchmark Kospi index.

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"The first victim will be technology firms, resulting in delays in investment or production," said Jeon Kyung-dae, who oversees equities at Macquarie Investment Management Korea.

"There are a number of other industries where South Korean firms rely on Japanese technologies, such as shipbuilding and machinery, and there's also concern over boycotts of Japanese products, or vice versa."

South Korea's stock market had already been roiled by US-China trade tensions, concerns surrounding the outlook for memory chip demand and sensitive relations with North Korea on its denuclearisation plans.

Last week, South Korean President Moon Jae-in's government lowered its growth forecast for this year.

The Kospi index slumped over 2 per cent on Monday, the biggest drop in two months as volatility climbed.

"The latest skirmish with Japan is just another negative as underlying productivity remains challenged," said Sat Duhra, fund manager at Janus Henderson Investors.

"We have limited tech exposure generally and certainly are not racing to increase this in the current environment."

CHIP STOCKS

Korean chipmakers extended last week's declines after reports that Samsung vice chairman Jay Lee traveled to Japan on Sunday.

Morgan Stanley said Samsung and SK Hynix have less than three months of inventory of the affected materials, while other media reports said that it could be less than a month.

"Just until last week, we thought the issue could be relieved with Korean suppliers who can replace Japanese makers," said Yoon Joon-Won, a fund manager at HDC Asset Management.

"But the visit of Jay Lee to Japan seems to have sparked worries that the situation could be worse than expected."

Still, some Korean firms stand to benefit. Shares of local Samsung suppliers jumped this month on expectations that they may win more orders due to Japan's restrictions.

JAPAN ELECTION

The upcoming Japanese upper house election slated for July 21 will be closely watched by investors like HDC Asset's Mr Yoon, who speculated that politicians may use the export ban issue as part of their campaigns.

"I'm not selling shares in Samsung because of the issue, as I'm waiting for the outcome of the Japan's election," Mr Yoon said. "Details on the exports curb may be released before the election."

For some, the tensions aren't a concern.

"We see a limited long-term impact as a political consensus will be reached, both countries are key partners with the US who would not want an escalating trade issue here," said Ewan Markson-Brown, portfolio manager for Baillie Gifford & Co.

Overseas investors have added a net 248 billion won of shares in Samsung since July 1, the most-bought stock on Kospi index.

"This is another sign of the emerging theme of de-globalisation," said Knut Gezelius, lead portfolio manager at Skagen Global.

"Investors need to ask themselves if the landscape is beginning to change fundamentally."

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