The Motley Fool

The New North Korean Factor For Investors

An ambiguity between Washington and Pyongyang echoes a similar historical tone between China and Taiwan, perhaps an early signal that investment opportunities are approaching. Investors should be ready.

The (abbreviated) evolution of North Korean risks to investors

For investors, any war outbreak creates a single outcome: risk off. Investors are likely to hide into safe-haven assets like the US dollar or gold, as suddenly, everyone has more important things to worry about.

Since becoming Supreme Leader of North Korea in 2011, Chairman Kim Jong-un has put the world on edge. Proliferating his country’s nuclear capabilities to ensure his own regime’s security, Kim frequently demonstrates the nation’s military power, galvanizing nervous markets especially when any missile launch is followed by bellicose rhetoric or antagonizing sentiment towards the United States and its allies.

Because the Korean War never technically ended with only the armistice agreement put in place, investors have always worried that any fighting conflict between the two Koreas would quickly escalate into a proxy war between China and the United States, disrupting the global economy and causing unimaginable damage.

After threatening Pyongyang with “fire and fury”, US President Donald Trump has taken the unorthodox engagement approach with Chairman Kim, having just completed the second summit with the North Korean leader at the end of February. While debatable if these meetings are convincing the North Korean regime to cease its missile launches or whether Pyongyang simply no longer requires testing, investors appear to have moved on, primarily focused on earnings expectations amid a slower economic backdrop.

A new landscape and possibly North Korean investment opportunities

Due to sanctions against North Korea, there are very few direct investment opportunities in the hermit kingdom. However, this hasn’t stopped investors from making alternative investment plays, the most common investment being physical property in Dandong China, the largest Chinese border city next to Sinuiju, North Korea. With logistical hubs and commercial centers, Dandong in principal benefits should economic reforms take place in North Korea. Property prices rise along slide improving reform anticipations and fall during prospects of war.

But the investment landscape may be changing.  An interesting epilogue following both Trump-Kim summits, as both leaders have promised to achieve full denuclearization in exchange for select sanction easing. But, as most political commentators point out, neither side has fully defined what denuclearization actually means.

Policy ambiguity is not new. A good example includes the 1992 Consensus between Beijing and Taipei, where both sides agreed that each nation belongs to the same China (One China idea), but with each side interpreting its own definition of what this agreement means. Like the One China concept, denuclearization ambiguity could be enough to spur investments into North Korea. Cross-strait trade between China and Taiwan have flourished despite the never-ending worry that Beijing would use military force on Taipei.

Why should investors care?

The bigger the risk, the bigger the reward. With a sub US$40 billion  GDP, North Korea possibly sits on mineral reserves estimated to be worth of at least US$6 trillion, including iron, gold, magnesite, zinc, copper, limestone, molybdenum and graphite. Reserve also include key metals necessary to make smartphones and other technological products.

With North Korea’s mining potential approximately 150x bigger than its current economy, it’s understandable why foreign companies remain keen, the most obvious being South Korea construction, infrastructure, and utility groups. With an estimated population of around 25 million, North Korea is also attracting manufacturing companies as labor costs for low skilled workers have risen elsewhere.

Going forward

While markets normally fall after a North Korea missile launch, ironically, dips have become shallower even as these events become more aggressive, suggesting that some are becoming jaded or ignoring the risk. But investors have good reasons to refocus attention back. Should missile launches remain grounded alongside some real show that nuclear facilities are being removed, international sanctions could slowly reverse in lockstep. The Trump-Kim summits took place in Singapore and Vietnam respectively, providing a good economic road map for Pyongyang on North Korea’s potential.

Even if the process is slow, the direction is positive. At the minimal, North Korea reform could become a new market driver for investors, a complete turnaround from a few years ago. During a press conference after the first summit, President Trump said “[North Koreans] have great beaches. You see that whenever they’re exploding their cannons into the ocean.” It will be interesting to see when people begin to holiday on those sands, as investors will not be far behind.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.