South Korea on sale, despite a hostile North Korea
North Korea has tested its most powerful nuclear weapon yet, believed to have 10 times the strength of the regime’s previous nuclear weapons. The North Koreans claim, and US intelligence agencies seem to agree, that the weapon is their first hydrogen bomb.
Continue Reading Below
In response to the test, US officials in concert have escalated the rhetoric. UN Ambassador Nikki Haley said North Korea was “asking for war,” and President Donald Trump, in his typical diplomatic fashion, attacked South Korea on Twitter for “appeasement.” Defense Secretary James Mattis said “any threats” to the U.S. and its allies will be met with a “massive military response.” “Threat” is a carefully chosen word, as it could mean anything from a rhetorical statement to an actual military strike. As media outlets have jumped on the U.S. rhetoric and the potential of the crisis to escalate to war, the South Korean KOSPI index has fallen about 2% over the past month and has recouped the bulk of those losses.
VIDEO:
Continue Reading Below
Advertisement North Korea could be destroyed within 20 minutes: Harry Kazianis Geopolitical Event Start Date 1yr later 5yrs later 10yrs later Korean War Jun-1950 22.9% 22.0% 16.9% Soviets into Hungary Nov-1956 -6.4% 12.4% 9.4% Six-Day War Jun-1967 14.3% 7.7% 4.4% Soviets into Czechoslovakia Aug-1968 -3.5% 5.3% 4.1% Arab-Israeli War Oct-1973 -39.8% 2.6% 9.3% Soviets into Afghanistan Dec-1979 32.3% 14.6% 17.4% Martial law in Poland Dec-1981 16.1% 19.7% 16.3% Falklands War Apr-1982 44.2% 26.4% 18.1% U.S. invades Grenada Oct-1983 3.8% 14.6% 14.6% U.S. invades Kuwait Feb-1991 22.7% 16.3% 17.3% The EU is formed Nov-1993 4.9% 22.5% 10.5% Serbians into Kosovo Feb-1998 23.5% -2.2% 4.6% Sep. 11 attacks/U.S. invades Afghanistan Sep-2001 -22.3% 4.6% 2.6% Euro become common currency Jan-2002 -22.1% 6.1% 2.9% U.S. invades Iraq Mar-2003 35.8% 11.5% 8.2% European Debt Crisis Dec-2009 9.9% 16.1% n/a N. Korea sinks S. Korean Navy vessel Mar-2010 22.5% 16.5% n/a Arab Springs Dec-2010 7.5% 14.9% n/a Syrian Civil War/Refugee Crisis Mar-2011 4.9% 10.6% n/a Rise of ISIS May-2013 21.4% n/a n/a Russia into Crimea Nov-2014 7.0% n/a n/a Brexit Jun-2016 17.4% n/a n/a In addition to this latest hydrogen bomb crisis, there are some other problems with the trend in South Korea: previous administration corruption led to a political upheaval. The new regime is center left rather than center right, which means some of the moves towards business freedom may be halted or perhaps even rolled back to some degree. Despite all of this, South Korea is one of our favorite places to invest international money. And not just because of the attractive valuation which comes from screaming headlines about nuclear bombs. One of the most attractive features of South Korea is that it is a highly resilient country. This means that it is more able than most other countries to absorb financial and economic shocks as well as periods of general investor fear (which the press has dubbed 'risk off' periods). Though resilient in general, it stands out as particularly strong in fiscal fitness, especially due to very low deficits and a high domestic savings rate. Low deficits mean, of course, that the government is not borrowing much (at least in comparison with other countries) and high savings rates mean that however much the government is borrowing, the domestic population has the financial resources to help a great deal with that financing. This leaves South Korea at much less risk for a debt crisis than if it were dependent on foreign lenders, who are more apt to stop lending during times of fear. This phenomenon is known as 'sudden stop' and can be very disruptive to a nation's financial system. South Korea is at relatively low risk for sudden stop. In addition, South Korea has the kind of trade dynamics which make it more resilient than most other countries. For example, it has a solid score when it comes to reserves of foreign currencies. This means that if the Korean Won is attacked by short-sellers, it is able to preserve the value of its currency by buying back that currency in open markets with currencies that are widely accepted, such as U.S. Dollars. In addition, South Korea has a strong trade balance. It sells its goods to many nations and in exchange gets large flows of foreign currencies, which have earned it a solid score of foreign reserves. These types of factors were important factors driving the 'Asian Contagion' of the late '90s. South Korea is not perfect. It has stalled somewhat in moving towards greater business freedom. It's quite free, but long-term returns tend to be a matter of shifts in freedom and not merely levels of freedom. There are some signs that the new administration is engaging in political 'payback' against the former administration (which was removed due to corruption) under the guise of an anti-corruption crackdown, selectively enforced (our friend Steve Forbes has written about this issue here Jerry Bowyer is Chief Economist of Vident Financial. To see more about which countries we think are most promising for long term investment and which are least promising, and why, please click here *A version of this investment piece first appeared on Vident Financial’s blog.