Over the past 50 years, South Korea has progressed from a poor agricultural economy to the 11th largest in the world and is an industrial powerhouse which is home to many global brands. Development has been facilitated by a state-sponsored capitalist model in which the chaebols have been used to channel resources in order to meet the government’s aims. Changes to the model were forced by the Asian crisis of 1997 which resulted in greater reliance on market forces.
2019 could be significantly more troublesome for financial markets as a number of indicators are now showing classic late-cycle features. Among them: corporate leverage. In the US, it rose further last year whilst picking up only slightly in Europe. At the same time cash holdings and capex in the US declined. Interest cover stabilised in the US and increased substantially in Europe. From a profitability and margin perspective European corporates converged further to the US.
In this month’s edition of ‘Thinking Ahead’ we look at developments in the financial markets of Korea.1 One area where Korea has a significant stake is that of trading in cryptocurrencies, something the country’s regulators will have to make a firm decision about in the coming months. Our explorations raise some interesting questions about the regulatory environment in Asia and how it contrasts with other regimes, in particular the EU and US.
Since 2010, there has been a surge in popularity for structured products in Korea. Their appeal among investors comes from their ability to generate steady revenue despite historically low interest rates and unstable financial markets in the aftermath of the global financial crisis (GFC). Korean investors are especially interested in structured products that are linked to complex over-the-counter (OTC) derivatives. Notable such products include equity-linked securities (ELS) and non-equity derivatives-linked securities (DLS).
The financial products which increased their volume rapidly during the last three to four years in Korea are structured products such as equity-linked securities (ELS) and derivatives-linked securities (DLS).
Korean retail investors’ view on ELS
In past times, cash-saving products and mutual-funds products used to lead the financial market in Korea, however, today, Korean investors are turning to ELS/DLS due to various choices in payoffs and tenors.