Seoul stocks outperforming amid rising tensions
By Kim Jae-kyoung
SINGAPORE ― "The more North Korea conducts nuclear and missile tests, the better" for the market.
This is the equation applied by the S. Rajaratnam School of International Studies (RSIS) at Nanyang Technological University in Singapore to describe how Korean and other East Asian exchanges are reacting to North Korea's saber-rattling.
Ironically, the KOSPI, South Korea's benchmark stock index, has been soaring over the past month, in tandem with rising tension on the Korean Peninsula caused by Pyongyang's ballistic missile and nuclear provocations.
Market analysts said investors are betting on Korean stocks on the belief there will be no military conflict despite the bombastic rhetoric both from the United States and North Korea.
"In my view the Korean market performance reflects no war," Mikio Kumada, executive director of Global Strategist at LGT Capital Partners in Hong Kong, told The Korea Times.
"Instead (there is) an expectation of improved international cooperation with all stakeholders. That is reflected in the fact that all regional markets are outperforming."
He also said Korean markets are being buoyed by an improving economic situation due to the revival of global trade and increased domestic political stability with the Moon Jae-in presidency.
"It's interesting that in the middle of all of this war rhetoric, the U.S. and South Korean stock markets are doing fine," said William Brown, adjunct professor at Georgetown School of Foreign Service.
"Does this mean investors are crazy? I think most people recognize the chances of a shooting war are slim."
Amid continuing threats from Pyongyang, the KOSPI hit a record high of 2,557.97 on Nov. 3, up nearly 200 points from the end of September.
The rallies were powered by foreign investors who posted net buying of over 3 trillion won in October when tension on the peninsula reached its peak following the North's sixth nuclear test.
According to a recent report by the RSIS, market bullishness is not isolated to South Korean stocks but is a common phenomenon for East Asia's equities.
The report, co-written by Kumada and Michael Raska, professor at the Institute of Defence and Strategic Studies, a unit of the RSIS, said the strength of East Asia's equity markets becomes particularly evident when compared to those of North America, Western Europe and Japan.
Since the beginning of the year, the MSCI Korea Index in U.S. dollars has jumped around 40 percent, while the MSCI Far East Index has increased about 33 percent.
That compares to about 20 percent, 14 percent, and 13 percent for the equivalent stock market indices of Europe, Japan, and the U.S., respectively.
In the report, Kumada and Raska said the positive economic and market trends may provide an important argument as to why hardly anyone in the business world takes North Korea's saber-rattling seriously.
"The pronounced strength of the Far Eastern indices may imply a benign geopolitical outcome on the Korean peninsula is in the making," they said.
"As a crowd, investors seem to have a clear vision. The current security developments on the Korean Peninsula are not leading toward a destructive war, but a pragmatic recognition of North Korea's nuclear status."
From this viewpoint, they think North Korea's current crisis escalation may paradoxically signal a willingness to engage in a process that points toward some form of a negotiated settlement, enabling a breakout from the current geopolitical deadlock.
"Restarting talks with North Korea amid conditions of strategic distrust and varying geostrategic interests would of course not be a straightforward deal," they said.
"However, potential realistic goalposts for restarting talks would include establishing crisis prevention mechanisms and communication links with Pyongyang to mitigate any potential escalation pressures or miscalculations."
In its latest report, global credit ratings agency Fitch also expects an outright war on the Korean Peninsula will be averted.
"While the current level of tension is high, strains on the Korean Peninsula are not new, and have followed a familiar pattern of rise-and-fall cycles in the past," it said.
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