death of Kim Jong-il: investment implications

North Korean media announced overnight that its “Supreme Leader,” Kim Jong-il, had died at age 70.  He will be succeeded by his third son, Kim Jong-un, a twenty-something with little experience and limited visibility, even in North Korea.

Asian stock markets sold off on the news.  That was on the worry, I think, that the North Korean government would stage a military provocation to “demonstrate” Kim Jong-il’s leadership ability–as it did when he was being introduced as heir.

investment implications

Other than in national intelligence agencies (which don’t share their information), the outside world knows very little about North Korea.  It’s an unruly client state of China, formed artificially at the end of the Korean War–separation along social and cultural lines would have been east vs. west.  It’s very poor.  It has big armed forces, but little industry.  It has nuclear weapons–and missiles capable of delivering them at least as far as Tokyo.

I think the most likely outcome from the leadership transition–temporary saber-rattling aside–is continuation of the status quo.

It is possible, however, that the absence of a dictator fully in control of the country will prompt a push in North Korea for reunification with South Korea.  This is something that both sides have talked about, off and on, for twenty years.  And there would be some pressure in the South for reuniting communities that have been apart for half a century.  Having seen the decade of economic stagnation that followed the reunification of the former East and West Germanies, however, I think Seoul would regard this as at best a mixed blessing, or as the best of a number of unfavorable choices.

This is the only outcome from Kim Jong-il’s death that I can see as having major investment implications.

I’ve always found South Korea a difficult place to invest in.  Lots of local quirks, including sprawling family-owned conglomerates (chaebols) with opaque operating procedures, and unpredictable (to me, anyway) intrusions of government into company operations.  So I’ve only occasionally owned companies like Samsung Electronics or Hyundai Motor, despite the excellence of their products.

I don’t think reunification would change government or corporate behavior at all.  Nevertheless, it would likely spawn enormous construction projects in the North, as well as the shifting of labor-intensive industrial production away from the South and the expansion of low-end Southern retail concepts there.  These moves could generate huge profits for the companies involved and would last a long time.

This prospect would most likely merit making the research effort to identify the beneficiaries.  In fact, the economic positives of reconstruction would probably be so powerful that a less-than-level playing field for foreigners might not matter that much.


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