The peaceful mood between South Korea and North Korea has pulled up prices of stocks that are expected to benefit from bilateral economic cooperation. Analysts, however, advise that investors had better confirm visible increases in corporate profits first.
Construction related stocks, including material, cement and paint companies, have soared steeply since early this year amid expectation on economic cooperation as the two Koreas head toward peace. Hyundai Engineering and Construction's shares, for instance, have risen more than 25 percent since January. The company has experience in North Korea, building gyms and cultural centers as well as leading in the construction of a light water reactor.
Analysts point out that Germany also witnessed a surge of construction stocks when there was reunification of East and West Germany. Construction shares rose 380 percent between 1988 and 1990.
Song Yu-rim, an analyst at Hanwha Securities, said that the opening of North Korean market will be meaningful for local construction companies which have suffered a lack of growth potential due to sluggish orders abroad and a peak in domestic housing business. "It would be like rain in drought," she said.
Moreover, the market is likely to be huge. According to Korea Research Institute for Human Settlements, joint development projects could cost as much as 93.5 trillion won.
Investment into infrastructure such as roads and railways will be given biggest priorities, as reflected in a remark by North Korean leader Kim Jong-un. At the summit, he invited President Moon Jae-in to visit North Korea via air, admitting that its roads were not in good condition. President Moon also introduced Land Minister Kim Hyun-mee to the North Korean leader as the person who will be in charge of linking the railways between the two countries. In the joint declaration, the two leaders agreed to link cross-border roads and railways as well as pushing forward SOC projects agreed upon during former Roh Moo-hyun administration. Local companies are expecting to win orders from state-run SOC companies such as Korail, the Korea Expressway Corp. and Korea Rail Network Authority.
While economic cooperation will open up new markets, Ted Oh, a strategist at NH Investment and Securities, advised investors to recognize the gap between expectation and reality since the share prices reflect only expectations.
"We can think about long-term benefits of each industry at this time, but we need second thought on issues like long-term investment perspective, concrete realization of economic cooperation and corporate profits. They may expand investment after confirming the effects of corporate profit expansion."
He also said that North Korea's economic policy matters. "Investors should focus on the pace of North Korea's opening. What matters most is whether corporate value of Korean businesses can really improve through cooperation with North Korea."
He said that stocks related with Gaeseong Industrial Complex can benefit, however, "the expectation was reflected too quickly in stock prices."
"Their valuation and fluctuation are little different from those of politics-themed stocks," he said. Politics themed stocks refer to the stocks whose prices fluctuate due to political issues instead of fundamental ones.