Customs income and deficit

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good morning. Shares rose more than 3% yesterday after NVIDIA reported 69% year-on-year increase on Wednesday evening. However, take a look at the long-term chart. The 2022-2024 Super Equity has been tracking the sidelines more or less since last summer. We were all talking about tariffs, deficits, bonds, but something has changed in the stock market. If you know what it is, please email us at unhedged@ft.com.

Customs income and deficit

Investors woke up yesterday morning with pleasant surprise. A US court has overridden Donald Trump’s mutual tariffs. This photo became a bit more complicated as the day was worn. The first another court again ruled over the president’s tariffs. Another court then allowed the tariffs to remain in place while the case proceeded. But in balance it was a bad day for Trump’s tariffs and a decent day for the market. The S&P 500 rose 0.4%. The Ministry of Finance is better. 10-year yield (down as prices rise) ended with a 6 basis point decline.

A slightly positive market response makes sense. The large cap index has already recovered from the “liberation date” shock. And then the tariff battle continues (I recommend reading my colleagues on this point). Uncertainty remains a major story, both in tariffs and what they mean for inflation and growth.

Not being raised is happy to see sand thrown into Trump’s tariff gear, but if the charges are delayed indefinitely, the deficit could have negative implications.

When the House passed the “big and beautiful” bill, many analysts and commentators noted that attendants’ increased deficits (an estimated 3.8 tonnes over a decade, potentially more) would be partially offset by tariff revenues. The scope of these revenue estimates varies widely. Goldman Sachs, for example, has a potential annual revenue of around $200 billion per year, compared to Numera Analytics’ annual revenue of around $350 billion per year.

Without that income, the current situation could add significantly more to US debt than previously expected, especially in recent years when tax cuts are expected (expenditure cuts would be in line with the longstanding government principle of eating ice cream before spinach). Capital economics predicts that without higher tariff revenues, the deficit will range from 6% of GDP to 7% of GDP. When it comes to deficits, the complete GDP point is important.

The impact on the bond market and the US fiscal balance is not clear. I don’t know where the tariff revenue is heading. Removal of tariffs could drive faster growth and lead to a more benign deficit trajectory. But take a step back. From the start, the bill promoted spending more than expected markets. Now it’s more visible.

(writer)

Korea looks cheap

The past nine months or so have been difficult for South Korea: martial law, four heads of state, presidential ammo each and Trump tariffs. The stock market has made some progress over the past month or so, but remains in range at best.

This is a long-standing problem of “Korean discounts,” as well as the lack of transparency in companies and weak shareholder protections that valuate them. Discounts to the US, narrower due to the 2022-23 Global recovery, are particularly wide.

Even companies like Samsung Electronics and SK Hynix, two of the world’s largest memory chip makers, trade at a price/revenue ratio of around 11 and 6, respectively. According to Factset, the US competitor Micron is 137. This has consequences. Large companies like Coupang and Toss have chosen to list on US exchanges for a higher rating, and domestic investors often prefer US stocks. Let’s take a closer look at the gap between Korea and its global peers from Dan Rasmussen of Verdad Advisers.

Stocks and the market won’t rise just because they’re cheap. We need a catalyst for change. In South Korea, Tuesday’s presidential election could help bring about corporate governance and market reforms that foreign investors have long sought. There is a precedent for this. When shareholder friendly practices lost some of the grips in Japan in 2023, Japanese stocks boosted a meaningful valuation.

There are already a few small changes. The “value-up” initiative began in February 2024 with President Sokyoll’s current shortage. It involves voluntary reform measures without penalties or incentives for compliance. Meanwhile, the ban on short sales, which was introduced for 17 months, was lifted in March this year.

Another potential catalyst for change: more households are invested in the stock market. According to the Korean Securities depository, the number of domestic retail stock investors has increased from around 6 million in 2019 to over 14 million today. This is important in a country with 52 million people. Now there is a coalition of voices from investors from their own countries that awaken how poor South Korea’s corporate governance is. It would pressure President Lee Jaemune to support market reform commitments, including a law that would extend the fiduciary duties of South Korea’s board to cover shareholders, if presidential frontrunner Lee Jaemune wins.

Changhwan Lee, chief executive of Align Partners, a Seoul-based activist investor, believes there is a potential for meaningful progress.

In my opinion, this is probably even greater change than in Japan. The government’s changes in Japan have promoted the Corporate Governance Code, Strategic Code. . . But they never changed the law. However, in South Korea, the (probably next) president is trying to change the law, and discounts are far more important than in Japan. This is because the conflict of interest between the controlling shareholder and minority shareholder is greater than in Japan.

Better corporate governance will not change the fact that South Korea’s GDP growth had changed to a negative negative last quarter. It also does not reduce the massive risks faced by US tariffs. But as Rasmussen said he had unedited:

You don’t need much growth. You don’t need a great economic story to get excited. All you need is balance sheet reform. People need to do wise things in terms of capital allocation and governance, and that alone can double these stocks.

(Kim)

One good read

progress.

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