South Korean consumer shares, 2015’s stock-market darlings as tourists from China flocked to Seoul department stores, are now among the nation’s worst performers this year as a missile spat cools relations between the neighbors.

A measure of such companies on the MSCI Korea Index has tumbled 5.9 percent in 2016 after its best annual gain in a decade sent valuations to a four-year high relative to the broader gauge. Orion Corp., a confectioner that earns more than half its revenue in China, and cosmetics maker Amorepacific Corp. are among the biggest decliners as the U.S. and South Korea consider installing the Thaad missile-defense system on the peninsula.

Policy makers in Beijing have objected, saying the shield designed to protect against North Korea’s nuclear threat covers more Chinese territory than the Koreas combined. Kee Hosam, a money manager at Dongbu Asset Management Co., recalls how Japanese stocks were sold off in 2012 amid a spat with China over islands in the East China Sea. The suspension of government-level exchanges or trade sanctions have been used in similar disputes.

“We can’t help worrying about China’s response,” said Seoul-based Kee, who helps oversee $10.6 billion in assets and has offloaded consumer plays linked to China from his portfolio. “We are concerned an unexpected issue could break out due to the conflict over Thaad.”

The MSCI Korea Consumer Staples Index last month capped its worst month in more than a year after North Korea launched a long-range rocket on Feb. 7, following a January nuclear test by Kim Jong Un’s regime. The 7 percent drop in February followed a 42 percent rally last year.

At just under 21 times its projected 12-month earnings, the gauge has fallen 16 percent off its peak valuation. Its decline this year came even as the yuan’s 4.9 percent gain against the Korean won made local goods cheaper for Chinese tourists.

‘Destroy’ Relations
China’s displeasure matters to South Korea. At $280 billion a year, South Korea’s trade with China is equivalent to that of its next four trading partners combined. The nation also received 5.9 million Chinese tourists in 2015, the leading source of visitors.

Qiu Guohong, China’s ambassador to the nation, said the deployment of Thaad could “destroy bilateral relations in an instant,” according to a Yonhap News Agency report last week. The remark led South Korea’s foreign ministry to summon Qiu to protest, according to another Yonhap account.

China broke off high-level contacts with Norway in 2010 after the Nobel Peace Price was awarded to dissident Liu Xiaobo, a move that also strained their trade relations and disrupted salmon exports from the Nordic country. Two years later, Toyota Motor Corp. and Panasonic Corp. suffered damage to their assets on the mainland and some Japanese retailers had to temporarily shut their stores after a territorial dispute over uninhabited islands in the East China Sea prompted protests in several Chinese cities.

China can take other measures if the spat over Thaad escalates, such as imposing restrictions on local tourists bound for South Korea, or increasing tariffs on consumer-goods imports from its eastern neighbor, according to Kim Su Hyuk, a fund manager at KB Asset Management Co.

“Manufacturers with factories in China could be also hit, if Chinese officials refuse to approve construction or operation of the Korean factories in the country,” Kim, who helps oversee 40 trillion won ($33 billion) in assets said by phone.

Everlasting Demand
Not everyone expects a lasting impact on consumer companies. Michael Na, a Seoul-based strategist at Nomura Financial Investment Korea Co., says he’s still bullish on Korean consumer shares and that such periodic corrections are to be expected as the U.S. raises interest rates. Regina Hahm, an analyst at Daewoo Securities Co., sees enough room to grow for Korean cosmetics companies as they still have a low share of China’s domestic market.

“Women rarely reduce their consumption of cosmetics, even amid low economic growth,” said Hahm, who has a buy rating on AmorePacific Corp. and LG Household & Health Care Ltd., the nation’s two largest cosmetics companies.

Government support is still important. Na Hong Suk, an associate director at Macquarie Securities Korea Ltd., says the success of Korean consumer companies over the past few years was helped by structural changes. In June 2012, South Korea eased visa requirements for Chinese visitors.

“Just a few months ago, many people thought Chinese demand for Korean products would be everlasting,” said Na. “But now, there is a big question over that belief.”

This article was written by Heejin Kim from Bloomberg and was legally licensed through the NewsCred publisher network.

Photo Credit: A traditional guard in Seoul, South Korea. Bailey Cheng / Flickr