Thoughts on Investing in North and South Korea Developed, emerging and “centrally planned” markets and what they mean

The upcoming summit between the leaders of the United States and North Korea is scheduled to take place on June 12^th in Singapore. Originally confirmed by the White House on March 8, 2018, the summit was cancelled in late May, then reinstated a few days later. If the summit takes place, it will be the first meeting between a sitting U.S. President and the leader of North Korea.

A Little History

The history of Korea is long and fascinating – with evidence that the Lower Paleolithic era – spanning the time when there was evidence of stone tool production and use – in the Korean Peninsula tracing its roots to about half a million year ago. For much of its long history, Korea was an independent kingdom and then in 1905, Korea was occupied by Japan following the Russo-Japanese War.

Following World War II in 1945 – after the surrender of Japan – Korea was split into two: with the northern half coming under Soviet-sponsored communist control and the southern half being administered by the United Sates – the notorious 38^th parallel.

The Soviets and Americans were unable to agree over Korea and so two separate governments were formed. Then the Korean War broke out in 1950 and when it was over, after much death and destruction, the status quo was restored with the 38^thparallel being replaced by the “Korean Demilitarized Zone.”

North Korea’s Economy

North Korea is what’s called a “centrally planned” economy, which is an economic system in which the government makes economic decisions rather than relying on interaction between consumers and businesses.

According to the Central Intelligence Agency, North Korea faces chronic economic problems, with industry nearly beyond repair, including industrial and power outputs that have stagnated for decades. Further, North Korea faces, “frequent weather-related crop failures and aggravated chronic food shortages caused by on-going systemic problems, including a lack of arable land, collective farming practices, poor soil quality, insufficient fertilization, and persistent shortages of tractors and fuel.”

To make things look worse, remember that in North Korea:

• almost all property belongs to the state;
• an independent judiciary does not exist;
• bribery is at virtually every level; and
• there is no effective tax system in place.

With all that negativity – and purposely ignoring the atrocious human rights violations perpetrated by the North Korean regime – if we could invest in North Korea, would it be a good idea? Let’s explore.

Emerging Markets

With its closed economic system and non-existent markets, North Korea isn’t even considered to be an “Emerging Market.” Instead, the 10 Big Emerging Market economies are: Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey.

But since we’re talking about North Korea, let’s focus on South Korea and what most investors probably don’t realize – that there has been ongoing debate among economists as to whether South Korea is a “Developed” economy vs. an “Emerging” one.

Here are some things I bet you might not have known:

1. South Korea boasts the 13^th largest stock market in the world;
2. South Korea is the 4^th largest economy in Asia and the 11^th largest economy in the world as measured by GDP;
3. South Korea is the 3^rd largest net exporter in the world;
4. South Korea's per capita GDP is $34,549; and
5. Life expectancy is a whopping 81 years.

And interestingly, South Korea is classified as an emerging market by some index providers and a developed market by others.

Returns of the South Korean Market

Here are the yearly returns of the KOSPI Composite Index:

Investing in Emerging Markets?

If stability between North and South Korea does in fact improve, then in theory, both countries (and the rest of Asia) should benefit. Whether it makes sense to consider South or North Korea as investing opportunities, however, is impossible to answer, because such a decision is a personal one.

But in theory, investing in South Korea and maybe soon North Korea – whether you consider one a Developed and the latter an Emerging market – might bring additional diversification and the potential for greater reward – as well as the potential for greater loss.

Call me to arrange a time to talk about your risk profile and whether you are adequately allocated to developed and emerging markets.

In the meantime, it will be interesting to watch the summit unfold – or not unfold – on June 12^th.

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