The possibility of war with pariah state North Korea has been back on the front pages recently.
The repeated rumblings and missile tests by the country’s outrageous leader (with whom I, and many normal Koreans, unfortunately share a name) have pushed conflict with North Korea up the agenda of “things to worry about today”.
That, at least, is the opinion of the world’s media…
“Is war coming to North Korea?” asks Al Jazeera.
“Here’s what a war with North Korea might look like,” explains geopolitical analyst George Friedman.
“Korean Peninsula ‘On The Brink of War’: Putin Security Chief”, reports Newsweek.
“What would happen if Trump NUKED North Korea?” asks the Express in the UK.
It wouldn’t take much
There certainly is a risk of war. In real life – as opposed to the echo chamber of analysis – anything can happen. And when you have two hotheads – U.S. President Donald Trump and Kim Jong-un, in this case – spouting inflammatory rhetoric, things can quickly go downhill.
The recent bombing of Syria by the U.S. showed that Trump’s foreign policy is guided by what he feels on the day. Kim Jong-un is equally unpredictable, and it could take nothing more than a side-of-mouth comment from Trump about Kim Jong-un’s bad haircut to trigger a violent response.
But probably not
Something entirely unexpected notwithstanding (and again, Trump’s hallmark is delivering the unexpected) I don’t think this crisis will be any different from many others in the past… for reasons that could also apply to a lot of other crises…
1. This hostility is part of a cycle.
As I mentioned a few days ago in the context of platinum, there are (at least) two paths of evolution. Most changes are cyclical… seasons, markets and moods, nearly all of the time, move in cycles.
In a tiny, tiny percentage of cases, the cycle itself changes. This is a structural shift… when climate change means that the cycle of seasons no longer applies, for example. But beware before you think something is a structural change: It has to be really different. “It’s different this time” is a very dangerous thing to say (and an even more dangerous investment thesis) because it’s very probably wrong.
What does that have to do with North Korea? North Korea and most of the rest of the world have disliked each other for the past few generations. Kim Jong-un periodically rattles his sabre at the west… and the west responds in the usual way; pressuring China to lean on the North Koreans; increasing sanctions; coordinating with critical regional allies Japan and South Korea, along with covert cyber countermeasures. The noise then subsides until the next cycle.
Cycles aren’t always predictable – but they are cycles. And this is one of them. Though the stakes are higher this time, with the steady advancement of North Korea’s nuclear programme, the script is otherwise the same.
2. Look at what they do… and ignore what they say.
“Actions speak louder than words”. It’s a cliché, but it’s also the truth.
Days ago, President Trump declared that the aircraft carrier USS Carl Vinson was headed to North Korea’s neighbourhood in the Sea of Japan, along with three warships… whereas in reality, they were going in the opposite direction.
We don’t know whether this was part of a savvy keep-them-on-their-toes approach to geopolitics, raw incompetence, or something else. But if the U.S. was escalating the situation militarily above and beyond rhetoric, we’d see a bigger buildup of warships in the region. If that happens, we need to pay a bit more attention.
3. First, the U.S. takes care of its own.
For a number of years I was a “trailing spouse” with the U.S. diplomatic service, as my wife was an American diplomat. I saw first-hand how the U.S. government took care of those who were serving its interests abroad. Accommodation, medical care, benefits, security… the U.S. government (despite its many, many weaknesses) makes sure that the material wants and needs of the people representing it abroad are addressed.
What does that have to do with Kim Jong-un and his funny haircut? The American government hasn’t said anything about evacuating its people – U.S. diplomats – from Seoul, the South Korean capital just 56 km from the border. Seoul represents everything that North Korea isn’t (advanced, wealthy, well fed), and would be at the top of the list of targets for North Korea’s leader. Of course, if U.S diplomats were suddenly evacuated, it would send a very strong signal of upcoming fireworks. But they haven’t. And won’t… and Kim Jong-un knows that.
What markets think about war with North Korea
Speculating about geopolitics is interesting… but without an investment angle, I lose interest pretty quickly. So what’s the angle here?
As shown in the graph above, South Korea’s stock market, the KOSPI, is very cheap (if you omit money-losing listed companies from the tally). At a forward price-to-earnings ratio of just over 9, it’s well below STI (at 14.7), Eurostoxx 50 (at 15.3), and S&P 500 (at 18.5).
But South Korea’s stock market is often cheap. Its president was recently impeached and indicted. Frequent bouts of political uncertainty have hurt valuations. Worse, for years the opaque financial groups that dominate the economy have frightened investors away – and led to a structural (not cyclical) discount for many South Korean stocks.
On another front, you might think that the perception of a higher chance of war has scared investors away. In fact, the South Korean index is up 9 percent since the beginning of the year, 2 percent in the past month and 3 percent over the past ten days. So it seems like stock market investors don’t think war – which would likely devastate the South Korean economy – is on its way. Why? Because they’ve seen it all before.
The recent market rally suggests that investing in South Korea in the face of whispers of war isn’t contrarian – in fact, it’s outright consensus. That doesn’t mean it isn’t a good investment idea. If you think it is, the easiest way is to buy an ETF, such as the db x-trackers MSCI Korea Index UCITS ETF (Hong Kong Stock Exchange; ticker: 2848), the iShares MSCI South Korea Capped ETF (New York Stock Exchange; ticker: EWY) or the Lyxor MSCI Korea UCITS ETF USD (listed on the Singapore Stock Exchange; ticker: AO9 and also on the London Stock Exchange; ticker: KRW).