Does the Trump-Kim summit matter for investors?

Trump & Kim

If North Korea gives up its nuclear arsenal, Donald Trump has promised that the country will have an “awesome” economic future with a wealth of opportunities on offer. The US president is not alone in seeing vast potential in the reclusive Asian nation. Billionaire Jim Rogers, one of the world’s most successful investors, famously said he would put his his entire fortune in North Korea if he could – and he plans to start investing north of the 38th parallel as soon as it becomes legal. But, is a significant liberalisation of the Korean peninsula really that likely? Should investors be getting as excited as Jim Rogers?

President Trump’s second summit with North Korean dictator Kim Jong-un collapsed last week, following demands to lift US sanctions entirely. Although talks ended abruptly and in failure, both sides expressed optimism that progress had been made and the door was left open for further dialogue. It is of significance that the talks were held in Vietnam, a country that was once a pariah state for the US but is now a major Asian success story. There were no private companies in Vietnam prior to its reforms, which started in the late 1980s, just like North Korea today. However, over the past few decades, Vietnam has transformed its economy through its “Doi Moi” development plan which aimed to create a “socialist-oriented market economy”.

Morgan Stanley reckons that a gradual Vietnam-style process could bring investment opportunities of up to $9bn a year. “North Korea’s 18 million working age population would join Asia’s production supply chain at an hourly wage cost lower than Vietnam’s,” the bank said. “A liberalised North Korea would provide the missing link in improving the trade connectivity of the Korean peninsula to Europe if inter-Korea rail connects to Russia and China.”

Pyongyang could easily emulate Vietnam’s success and develop from a closed society strangled by central planning to a wealth-generating nation of capitalist enterprise. The country is naturally abundant in metals such as zinc, tungsten, and iron and some estimates have put the value of its natural resources at more than $6 trillion (£4.5 trillion). The opening up of its economy would allow partnerships to develop these valuable resources. Tourism could also become a major wealth generator. For Vietnam, travel and tourism made up 10.4pc of its total GDP in 2017 and supported 313 million jobs – or 9.9% of total employment – according to the World Travel and Tourism Council. Indeed, this potential was spotted by President Trump last year. Following the Singapore summit in June, he noted that the potential for property development in the nation was phenomenal. “As an example, they have great beaches,” Trump said to reporters. “You see that whenever they’re exploding their cannons into the ocean. I said, ‘Boy, look at that view. Wouldn’t that make a great condo?’”

However, tourism has been tried before – and it all ended in tragedy. In the early 2000s, the country operated some closed tourist resorts for South Koreans that were good sources of hard currency for the regime. But Pyongyang was keen to keep its citizens apart from tourists and a South Korean woman was shot and killed in the Mount Kumgang Tourist Region in 2008 after “wandering into a military area”. Access for foreigners was then closed. This highlights the tensions between generating wealth and maintaining a dictatorship for the Kim family. It is obvious that Kim Jong-un’s number one priority will be maintaining his grip on power – and everything else is likely to be secondary. It therefore remains unclear whether current talks represent a genuine strategic shift for the country or if they are merely a short-term tactical move. Granting even a small number of the freedoms that come alongside a capitalist society will cause no end of trouble for the powers in control in Pyongyang.

Jim Rogers, who set up the Quantum Fund with George Soros and was a renowned China optimist when it was unfashionable in the 1990s, is possibly the biggest bull of North Korea that there is. He believes that a combination of North Korea’s “disciplined, educated, very cheap” labour force and the country’s untapped natural resources such as coal would combine well with South Korea’s “capital, management ability, and expertise”. But this implies steps towards reunification of North and South – a proposition that appears unlikely to be considered any time soon, barring a total economic collapse of the North.

Of course, there is no stock market in North Korea, but Seoul’s stock exchange is easily investible from the UK through active and exchange-traded funds. Any resolution with the North will reduce the geopolitical risk for South Korean equities and is likely to provide a significant market boost. Indeed, the truncated summit in Hanoi this week resulted in a fall in shares listed in Seoul as hopes of a resolution faded. However, one big issue that investors must consider if they are looking at an investment in South Korea is that the Kospi is dominated by one just share – Samsung – which has a 26.4% weighting in the index. This means investing in South Korea could increase a portfolio’s exposure to technology significantly – and potentially leave it overexposed to the sector. However, Kim Jong-un’s desire to keep his grip on power means investors should not get as excited as Jim Rogers just yet. North Korea won’t open up any time soon.

 


The above article was previously published by Charles Stanley on 4th March 2019