(Bloomberg) -- Fears of a global recession are hitting South Korean assets hard from stocks to its currency as investors flee the export-reliant nation.
The Kospi index tumbled 3% on Monday to its lowest close in more than two years, leading declines in Asia. The won, by far the region's worst performer this quarter, slid to the weakest level since March 2009 versus the dollar. Government bond yields surged across the curve.
Korea's export reliance and strong trade ties with China have backfired as sources of weakness in recent months, in sharp contrast to the earlier days of the pandemic when they helped buttress the economy. The stock market's relatively heavy tech exposure has also proved costly in an environment of rising rates and a stronger dollar.
Samsung Electronics Co. and battery maker LG Energy Solution Ltd. were the biggest drags on the Kospi in Monday's session.
"South Korean stock markets are highly sensitive to external economic factors, so they have reacted excessively to global economic uncertainties," said Seo Jung-Hun, an analyst at Samsung Securities Co. "The won's sharp fall against the dollar relative to other currencies is also not favorable to local markets."
Foreign investors have sold a net $13.7 billion of Korean shares so far this year, according to exchange data compiled by Bloomberg. Down 25% this year, the Kospi is headed for its worst annual performance since 2008.
Having gone through the 1997-1998 Asian financial crisis, Korean authorities have spent years building up foreign exchange reserves to protect the won in times of intense foreign selling. Policy makers have issued a series of warnings recently to curb speculative bets, though the impact has been fleeting amid the dollar's rise.
The won's rapid depreciation comes even as the Bank of Korea has hiked interest rates at every policy meeting since April, including a first-ever half point increase. On Monday, Governor Rhee Chang-yong said rates aren't the only way to deal with a foreign-exchange crisis and Korea should encourage some of its overseas investments to return home.
The smaller Kosdaq index sank 5.1% to the lowest since May 2020. In the bond market, three-year government yields surged 33 basis points to 4.46%, also affected by a tumble in global bonds.
To some in the market, the won's latest slide is excessive when considering that the country's fundamentals are relatively solid.
Korea's current-account balance has been in surplus in all but one month this year, and its latest inflation at 5.7% is lower than levels in the US and some other developed countries.
"The won's movement appears extreme as there are no signs of risks that make South Korea stand out from other countries," said Kong Dong Rak, fixed-income strategist at Daishin Securities Co. "Market sentiment seems a little excessive today."
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