The “summit of the century,” between Kim Jong Un and Donald Trump, started today. For months the media has gotten along by throwing cold water on the Trump-Kim summit, but as investors, it’s important to be warry of headlines. The news industry - which exists to get clicks and views – should not drive our investment decisions around the Korean peninsula. Instead, we should look at what the markets, the people who have skin in the game, are saying about North Korea. For months now, the performance of Korean markets has been tied to the Trump-Kim summit. During the month of February, when Trump announced new sanctions and Kim Jong Un threatened a nuclear holocaust, the Korean KOSPI index plummeted nearly 9%. When President Trump “cancelled” the summit with Kim in late May, after a large run up, the KOSPI stumbled, dropping 2.5% in a day. But recently the KOSPI has been doing very well, up 2.5% from the beginning of the week.
As you may remember from earlier pieces (here and here) on the Vident blog, South Korea is a highly developed, free-market economy, which is very resilient to economic instability. The one thing that has repeatedly impeded South Korea’s market performance has been tension with North Korea – if only for a few days at a time. In the Heritage Index of Economic Freedom, South Korea has very high scores in metrics such as Business Freedom and Trade Freedom. They’re highly stable as an economy, with low debt-to-GDP and inflation. But there are innumerable examples of market run-ups that were stopped in their tracks or outright reversed by bad news from north of the 38th.
How much more successful will South Korea be, and how much better will their performance be, if the North Korea situation is resolved? How many market rallies that would otherwise be cut short by a threat of nuclear war will come to fruition? If the thousands of pieces of artillery presently aimed at the South Korean capital are no longer present, the major threat to the South’s economy will have been severely weakened.
The Korea summit has major implications for another major East Asian economy: Japan. As is illustrated in the chart below, both Japan and South Korea suffer a major drop in February when tensions were high and have been doing much better as the meeting has become more likely. (That last dip is when Trump briefly cancelled the meeting.)
*South Korean KOSPI in blue, Japanese Nikkei in orange (Article courtesy of TradingView.)
Many in the media say that the North Korea summit is overhyped and that nothing of long-term importance will come of it, which is certainly a possibility. But the markets, the people whose livelihoods depend on getting things right, have shown their regard for the meeting with much more optimism.
If Trump and Kim can reach a deal, the major outside threat to the South Korean and Japanese economies will have been eliminated – not to mention a non-marginal threat to the US. And, as of right now, markets are signaling that Trump and Kim will likely reach a positive arrangement. Which is something all of us, but especially investors, should be happy about.