What would a more open North Korea mean for investors?

 

Focus on relations between Pyongyang and the world

President Donald Trump and Kim Jong-un might soon face each other across a negotiating table. Aside from all the usual questions about whether it will actually happen and whether North Korea might really get rid of its nuclear weapons, investors are left wondering what this might mean for them.

Despite talk of peninsula reunification, the most sensible first step would be for the North to stand alone as a normal country in its own right. This would serve the interests of all its neighbours and the US and is probably the most sensible first goal.

There is a tendency to think that any rapprochement would bring bills for South Korea akin to those borne by Germany during its reunification period.

However, the precedent set in Myanmar shows that supra-national agencies can (and will) pour money into infrastructure, health and connectivity, while companies bring factories and legitimate hard-currency earnings.

Benefits for South Korea

Not that the governments of China and South Korea would be reluctant to invest though. South Korea needs contracts for its heavy industrial companies, hit hard by the collapse of both the global shipping cycle and oil prices in recent years.

The South has a rapidly ageing population, where the rate of deaths now exceeds births, while 68% of the North’s population is of working age, with an average life expectancy of 69.

Of course, youthful workers would come at a cost – training is expected to be expensive, but with mobile phones, intranet and e-payments already prolific in the North, training the workforce will not start from a knowledge base as low as in Myanmar.

For some companies, the attractions are obvious: the North has abundant resources of both coal and iron ore, which the South might legitimately help to develop (using South Korean machinery) in return for discounted commodities.

Consumer goods should benefit too – demand for South Korean branded goods and snacks is likely to rise sharply in the North as soon as they are allowed, while families divided by the war are likely to want to take car-loads of goods to relatives in the North.

As online shopping already allows North Koreans to buy imported goods and food on the national intranet, distribution may be easier than might be imagined.

Boost for Chinese regions

Nor will South Korea be the only beneficiary. China’s North Eastern provinces of Jilin, Liaoning and Heilongjiang are reeling from the loss of heavy industrial jobs, after China’s shift to cleaner industry bit hard, and new customers would be welcome.

More tangentially, the South’s decision to buy the US’s Terminal High Altitude Area Defence missile system in 2017 led China to embargo Korean goods of all sorts, so rapprochement may lead to détente – and returning profits too.

There is no discernible timescale for all of this yet. Things are moving very rapidly, but could accelerate like the fall of the Berlin Wall, or collapse back into near or actual hostility – and it is far too early to buy anything purely for North Korean upside.

We own many companies which stand to benefit if the North finally opens up, but they were bought on a sound investment case that does not rely on a boost from the North.


 

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Author Sally Macdonald

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