Missile Shield Truce With China Gives Cover to Korean Rally
(Bloomberg Gadfly) -- So much for the Thaad put.
South Korea said Tuesday it has restored normal bilateral relations with China following a year-long scuffle over the deployment of a U.S. missile shield meant to guard against a North Korea attack.
This should bode well for companies like Hyundai Motor Co., Lotte Shopping Co. and Amorepacific Corp., which suffered a sharp drop in sales -- and stock prices -- after the spat over the Terminal High Altitude Area Defense system prompted Beijing to call for a consumer boycott of marquee Korean brands.
China said Tuesday it still opposes Korea's deployment of the missile system, claiming the U.S. can use it to monitor China's security operations, but that it will "communicate with Seoul" over Thaad. In other words, the two countries have agreed to disagree.
Warming relations had already started to make an impact on share prices among the most affected companies in the past month.
Shares in a basket of nine Thaad-related stocks have surged almost 20 percent from the index's all-time low on Sept. 22, compared with a 5 percent rise in South Korea's benchmark Kospi Index.
Two of the biggest movers were Amorepacific and Hotel Shilla Co., which had shot up almost 34 percent and 42 percent since Sept. 22 on reports China would start allowing group tours to return.
Both the Korean beauty chain and hotel operator relied on those shoppers for much of their recent growth and a resurgence of sales could help them beat what had become pretty dour earnings expectations.
With China's party congress out of the way -- and the message received that the country is indeed powerful enough to dent South Korea's economy if it feels a threat to national security -- attention can turn back to growth.
And there are economic incentives for China to restore ties with Korea. For instance, Beijing must lift the group travel ban to South Korea ahead of the Pyeongchang Winter Olympics in February if it wants Seoul to return the favor when China hosts the same event in 2022, analyst Douglas Kim writes on Smartkarma.
Of course, just because China's tone has softened doesn't mean Korean companies are totally in the clear. Relations will no doubt be tested by a visit to the region from U.S. President Donald Trump in the coming weeks, and by China's increasing military might in the longer term. And companies like Hyundai Motor, which had been using the tensions as a convenient excuse to mask other problems, will now have to work even harder to win customers back.
Investors would be naive not to price in the so-called known unknown of China's sporadic use of economic retaliation to fight political battles. But that doesn't mean those looking to scoop up a bargain as this earnings season unfolds can't benefit from a group of down-trodden stocks poised to beat low analyst estimates.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.
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