Win for the US and North Korea, Lose for South Korea, What for the investors?
Two weeks ago, there was a historic summit in Korean Peninsula. North Korean leader, Kim Jung Un, met with South Korean President, Moon Jae In. Somehow, the world has forgotten the strong tension between Trump and the ‘Rocketman’ few months ago before the Olympics in Pyeongchang. Peace is a sweet word and it is one of many Trump ‘accomplishments’ in addition to the revised FTA and Won – Dollar discussion with South Korean government although the details regarding currency was not released.
Trump administration signaled several decoupling with South Korea. South Korea was often regarded as one of the strongest allies of the US but nowadays South Korea was often accused of being ‘unfair’ and ‘free rider’. To support Trump’s argument, the sentiment in Korea is somewhat different from 50 years ago. South Korea does not consider the U.S. force, a necessity so there is no point for the US troops to stay in Korean Peninsula when their forces are ‘unwelcomed’ and ‘mistreated’. The new era of geopolitics has brought the idea that the U.S. does not necessarily need foot soldiers in South East Asia continent. Okinawa base could be enough for the US to put pressure to China.
Trump has been playing North Korean card to pressure both Iran and China. In hope for peace and prosperity, South Korean government foolishly limited itself with only one viable option. If the deal between North Korea and the U.S. does not go well, South Korea is left with no option. The tension between two would rise and South Korea, one day, would need to pick a side again. The U.S. has signaled of reducing their forces in South Korea multiple times before. Trump administration is not reluctant for such ‘behavior’.
On the other hand, ‘Rocketman’ has been successful for past few months. North Korea is constantly on the world news front page. South Korea is now filled with hopes for peace to the level where the talks of unification is slowly brought up in the news in South Korea too. ‘Rocketman’ could constantly ask for capital support, dollar most likely, from South Korea if the deal goes well. Trump pulling out of Iran deal has left ‘Rocketman’ with legitimacy in his pulling out from the deal with Trump in some future time too.
So what is left for the U.S.? This is a strong win for Trump. Now, Trump has a good reason to strike down North Korea if the deal has not met with the promise since the U.S. does not feel to be obligated in protecting South Korea like before. If the deal goes well, Republican party would gain additional support from neutral voters during midterm election. Today, Trump gave a strong warning to North Korea in an indirect way. If whatever promise has not been kept, the U.S. would not hesitate to leave the deal.
Enough of Politics. Should one invest in Korea or not?
The key factor here is the interest rate. Rising interest rate in the US would bring bearish market to the Korean market resulting significant increase in borrowing costs. Although Korean market currently is on an uptrend, unlike the U.S. market, only bio and semiconductor stocks are leading the market. In other words, the low interest rates for past years has caused investors to chase after higher yields, investing in the emerging market. The driving factor of the surge in South Korean market has nothing to do with South Korea. Ultimately, when interest rate goes up, dollar would be strengthen, the value of emerging market currency would fall, and emerging markets would fall. Unlike other times, investors would not seek for such gain on exchange because dollar would be strengthen over the time. Thus, there is no point in being long or short on the market because the value of won would keep fall compare to dollar.
Moreover, current South Korea is suffering from high unemployment rate and high corporate taxes. There is a huge outflow of human capitals into Japan already. South Korea is relying on hiring more public service personnels to help the unemployment. This is a significant sign of the downfall of one’s economy.
Investing is all about the risk and the reward. What is the point of investing when the risk is high but the reward is so little.