Quo Vadis, North Korea? A quick look at the recent developments through the lens of an investor (part 3)

Quo Vadis, North Korea? A quick look at the recent developments through the lens of an investor (part 3)
28 September 2018

Politics are messy, complicated, and (most of the time) boring. This weekly publication doesn't aim to become a regular commentator to political events of any individual country. However, I am happy to make exceptions when the prize is right.

How does the following key country data sound to you?

  • Unexplored natural resources worth $10tr (i.e, $10,000bn), including rare earths needed for the production of digital devices.
  • A GDP per capita that is just 4% of its neighboring, politically closely related country.
  • A need for $500bn in investments over a period of 20 years.

These figures, which describe the North Korean economy, should get anyone with an interest in investments to listen up.

Here is a country as underdeveloped as they come, but with significant natural resources, a neighboring country that has both the interest and the cash to help with developing it (South Korea!), and a leader who is moving things into the right direction.

Or is he?

Depending on which media lens you look through, the path taken by North Korea under Kim Jong-un will look entirely different to you.

Do you believe in markets or in media talking heads?

European and American media remain coy when reporting about North Korea and the political developments of the region. Here are some recent headlines and quotes:

  • "It's hard to assess progress" (NPR, a partly government-funded US media outlet)
  • "There is no evidence... of North Korea changing" (BBC)
  • "Negotiations between Pyongyang and Washington have stalled" (The Guardian)

Compare that to the following high-level observations:

  • The South Korean leader is now traveling straight to North Korea for talks, when even just half a year ago he was afraid such a step would lead to him being captured and held for ransom.
  • Both countries are now engaged in a broad set of day-to-day political business, when as recently as April even just any contact at all was seen as positive.
  • The US government is working on the schedule for another high-level meeting between the two countries in October when just a year ago both countries' respective leaders threatened each other with nuclear annihilation via Twitter.

These two sets of bullet points describe one and the same situation, viewed through two different lenses. They are evidence of how it's possible that people who live on the same planet can live in entirely different realities.

The - neutral - verdict of the markets?

South Korean shares that are a play on an opening up of the North Korean economy are continuing to do well. The "pure play" on North Korea that I featured last week, Hyundai Asan, remained on the up during the past few days and could even hit a new record high soon.

You can argue about politics and the media, but there was money to be made from all this!

Business leaders are smelling the coffee

During the past few days, it has emerged that South Korean business leaders have just visited North Korea to establish talks about investments.

Samsung, Hyundai, POSCO and SK Group - major South Korean "chaebols" (corporations with a mix of business interests) - have all sent their chairmen or similarly senior representatives to a meeting in North Korea (!) with Kim Jong-un himself.

Their aim? To find a strategy that allows planning significant investments in North Korea, which in turn is believed to then make it easier for Kim Jong-un to agree to denuclearization.

Obviously, in the current situation, not one of these large, mostly publicly traded firms would agree to invest in North Korea without an agreement on denuclearization. The fact that these companies' leaders were participating in such talks goes to show there is increasing belief that North Korea will indeed enter an entirely new era.

Looked at it from yet another perspective, the prospect of investments being agreed subject to denuclearization could give Kim Jong-un the necessary leverage over his own political stakeholders to push through the required changes on his end.

It also puts South Korea's President Moon into a good position. By bringing along the leaders of his country's most financially solvent chaebols, he is showing that he wants to help his sister country. He, too, will be making it clear that for the chaebols to sign investment agreements, the 70-year-old war between both countries needs to be ended and further change implemented.

This wasn't even difficult to figure out in advance

Ultimately, all of this is negotiating-101.

It was clear even before he took office that Trump was going to be a peace-through-strength figure (he said as much at most of his rallies, many of which I have watched).

Trump's message: "Tick, tock, your time is up and we can blow you off the face of the earth. But we will offer you all sorts of carrots before we whack you with a stick." The result of his negotiating stance is currently visible in the advancing peace talks.

Though ultimately, these talks can really only be resolved by the two protagonists, with the US merely helping from the sidelines.

They could also still fall apart, and no doubt there'll be hiccups, delays, and a lot of posturing along the way. However, for now, at least, the markets seem to be taking the view that North Korea is one of the world's most unusual emerging investment destinations.

Which, if you had taken a look at the situation on the ground, has been clear for months already.

Where are other such perception gaps?

I am not going to turn this weekly dispatch into an ongoing commentary about North and South Korea. For now, this concludes my 3-part series about these two countries (both previous parts are available on this website).

The point is clear. There are investment opportunities in this world that are perfectly clear if you make an effort to travel to the relevant countries and look at them in situ (as I did in the case of South Korea earlier this year), but which the corporate media in other parts of the world is entirely missing out on for one reason or another.

E.g., the South China Morning Post already carried an extensive article about the chaebols visiting North Korea to discuss investments. Hyundai Asan, in turn, is in talks to restart its tourist tours of the Kumgangsang mountains, something that is now officially backed by the leaders of the two Koreas, subject to conditions being seen as right.

How much of that did you get to read about in the likes of BBC, NPR, and The Guardian? You see my point. I love the corporate media for being so slow and stuck in their existing views, because it offers us the opportunity to be quicker than them.

South Korean shares are quite accessible to foreign investors and nothing would have stopped you from investing in inter-Korean shares that I discussed in last week's issue.

The investment story that is North Korea is probably only at its beginning, and I'll get back to it at a later stage. However, more interesting is the question "where is the next such perception gap that can be exploited by early-bird investors with a global outlook and a penchant for off-the-beaten-path research?"

Undervalued-Shares.com is already researching several similar situations.

What's more, I always welcome input and ideas from readers! If you think there is a story out there that is worthy of further research, do drop me a note. I personally read and reply to every email I get from readers.

Until next time - peace!

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