How panicked were investors last week about China's stock market plunge? Enough to treat the Korean Peninsula, a place that was teetering on the brink of war, as a safe haven. Even as policy makers braced for renewed military confrontation between North and South Korea, the won staged a rally.
That's made South Korean assets one of the few bright spots in a dark time for emerging markets. On August 24 alone, investors yanked $2.7 trillion out of developing nations, with Indonesia, Malaysia and Thailand especially hard hit. It matched the violent September 2008 sell-off after Lehman Brothers collapsed.
It's not hard to explain why many Asian economies are suffering from China's slowdown. Exporters of commodities, who depended on a humming Chinese market, have especially suffered. But why are there such big outliers among battered emerging markets?
The answer is that investors are finally basing their decisions less on herd mentality than nuanced, case-by-case analyses. "Emerging market investors have become a lot savvier," says economist Frederic Neumann of HSBC in Hong Kong. "Gone are the days where emerging markets were all lumped into one bucket. Today, countries with stronger fundamentals are able to resist the spread of contagion washing over global financial markets."
The common link among the success stories is they've got the basics right since Asia's 1997 financial meltdown: They have healthier financial systems, greater transparency, stronger banks, sober national balance sheets, and reasonable current-account deficits.
Korea is on the "more credible side of the spectrum", says economist Marc Chandler of Brown Brothers Harriman. Even though China's downshift and US interest rate hikes will eventually make a dent, the won was Asia's top performer last week. Its 2.7 per cent gain almost matched the drop in the Chinese yuan since August 11.
It may be time to start counting Korea as a developed nation, rather than an emerging market. Korea still faces many challenges, not least of which are its rogue family-run conglomerates. But its macroeconomic performance deserves the recognition it's receiving from investors.
The same goes for the Philippines. Since 2010, President Benigno Aquino has steadily improved his nation's debt position (winning investment-grade ratings in the process), attacked graft and drawn in waves of foreign-direct investment.
Risks abound, of course. While South Korea's economic fundamentals are stable - it's growing at a rate of 2.2 per cent with a 3.7 per cent jobless rate - its high household debt of $458 billion is a concern. Manila, for its part, faces an uncertain 2016 election, in which Ferdinand Marcos Jr, son of the dictator who ravaged the nation in the 1970s and 1980s, may make a bid for the presidency.
For now, the relative stability washing over Korea and the Philippines underscores that steady leadership and long-term thinking matter. It also shows that global investors are getting better at identifying those factors in Asia.
© Bloomberg
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