Geopolitical risks weigh on stocks, but won’t last long

By Yoon Ja-young

Heightening geopolitical tensions on the Korean Peninsula are expected to keep the stock market from posting any marked rebound for a while, as investor sentiment will remain weak, analysts said Tuesday.

However, they said it will not be fundamentally different from past North Korea-related events whose negative impact was short-lived.

The main KOSPI index closed at 2,123.85 points, down 0.44 percent or 9.47 points; while the Korean won closed at 1,145.8 won to the dollar, losing 3.6 won.

The KOSPI has been sliding following a report that the U.S. notified its allies including Australia that it may shoot down North Korea’s test rockets. There is also a rumor spreading on social media that the U.S. is a planning a pre-emptive strike on North Korea, which South Korea’s defense ministry said is groundless.

The impact of North Korea risks on the financial market used to last for a few days, but the market seems to have found reason to be more sensitive this time around.

“The U.S. is hinting at much stronger pressure on North Korea than before. Investors should acknowledge that for the time being, the stock market is likely to react sensitively to the issue,” said Cho Byung-hyun, a market analyst at Yuanta Securities.

Following the inauguration of U.S. President Donald Trump, there is consensus that the strongman will bolster pressure on North Korea. The U.S. has attacked Syria and sent a nuclear-powered aircraft carrier to the Korean Peninsula.

Market watchers agree that tension is likely to escalate for the next few weeks as North Korea has key events such as the fifth anniversary of its leader Kim Jong-un’s inauguration, the 105th anniversary of its founder Kim Il-sung’s birth, and the 85th anniversary of the founding of the North Korean army.

Even so, analysts say that it isn’t fundamentally different from previous geopolitical risks.

“Most of all, North Korea is different from Syria or Iraq,” said Kim Yong-gu, an analyst at Hana Financial Investment, pointing to North Korea’s military power.

“There are Russia and China behind North Korea, while South Korea and Japan are located within its missile range. The possibility of the U.S. attacking North Korea is extremely small,” he said.

Analysis on previous North Korea related events such as missile launches and the death of Kim Jong-il, Kim Jong-un’s father, show that the impact on the stock market was not huge though there was a rise in the won/dollar rate on the foreign exchange market. The negative impact, however, started to fade out within three trading days of the event, according to the analyst.

Hana’s Kim said that geopolitical risks on the Korean Peninsula are already reflected in the Seoul bourse as the “Korea discount.”

He stressed that investors who make mid-to-long term decisions used to consider the geopolitical risks of Korea as opportunities to increase stocks in their portfolios.

Kim Il-goo, an analyst at Hanwha Investment and Securities, said that the U.S. seems to have the “economic collapse” of North Korea on its mind through military pressure.

“Facing the U.S. pressure such as THAAD and the aircraft carrier, North Korea will have to increase military spending. Since Chinese companies that trade with North Korea will also be sanctioned through a secondary boycott, North Korea will face severe economic pressure as time goes by,” he said, comparing it to the collapse of the Soviet Union. THAAD refers to Terminal High Altitude Air Defense, a U.S. anti-missile system to be deployed in Korea.

“Of course, it is not a positive factor for the financial market since long-term pressure also means an extension of uncertainties. However, since the North Korea risk has existed on the Seoul bourse for decades, the recent changes do not mean the emergence of any new negative factors,” he added.

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