On November 23, North Korea fired 170 rounds of artillery on Yeonpyeong Island in South Korea, which resulted in the deaths of two South Korean marines and two civilians. The US and South Korea responded with military war exercises. The day after the Yeonpyeong Island attack, the KOSPI (South Korean stock market) dropped 2.33% in the morning, but closed down only 0.15% for the day.
The paths chosen by South Korea and North Korea have become a fascinating case study on the success of one nation given the opportunity to realize its potential versus the despair and hardships of a nation suppressed. One country has embraced capitalism, while the other is stuck in desolation and government control. We believe South Korea has changed dramatically in the last 60 years as a result of the Global Technology Revolution. We believe the future of South Korea is very bright and the recent action of the KOSPI stock market is once again confirming that freedom and capitalism are winning again.
AP recently reported that a new North Korean uranium facility appeared very modern and supposedly contained 2,000 centrifuges to enrich uranium. However, we don’t believe that North Korea has the ability to cause significant problems today. They use their nuclear potential as a way to stay viable and negotiate for aid due to their massive economic troubles.
If war breaks out, the iShares MSCI South Korea fund would certainly take a hit, but with global companies such as Samsung, Hyundai, KB financial and LG as top holdings, we believe the disruption would not last long as earnings would continue to thrive in the global markets. Any major war would signal the end of North Korea as we know it, and the South Korean KOSPI would most likely rebound quickly. However, we believe war will not occur at this time and the South Korean stock market will continue to perform well relative to the world markets.
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