Goldman Sachs sees N.K.’s transition unlikely to hurt southern economy


South Korea’s financial markets are expected to get back to normal after a setback on Monday following the death of North Korean leader Kim Jong-il, analysts said on Tuesday.

The KOSPI’s historical patterns indicate that the latest shock will not have a serious impact on the index, while risk signals such as credit default swap premiums remain stable. Foreign investors haven’t shifted their stance drastically on the local bourse amid cautious optimism from foreign investment banks.

The local bourse closed up 16.13 points, or 0.91 percent, to 1,793.06 on Tuesday, suggesting that the worst may have already passed after investors were jolted Monday afternoon by the surprise news.

Brokerages in Seoul said that investors might use the incident as a buying opportunity in consideration of past cases where KOSPI bounced back relatively quickly in the wake of negative North Korea-related developments.

“Most North Korea news in the past had a short-term impact on the South Korean stock market,” said Samsung Securities. Investors, however, should pay attention to the heightened geopolitical risks, while checking closely the foreign exchange rate and foreign investors’ trade patterns.

On July 8, 1994, when the former North Korean leader Kim Il-sung died, the Seoul bourse ended up 0.34 percent to close at 956.38. The next day, the index went down by 2.11 percent before recouping losses to end down a mere 0.8 percent.

When South and North Korean soldiers engaged in brutal maritime clashes in the West Sea near Yeonpyeong Island in 1999 and 2002, the KOSPI plunged by 2.71-3.9 percent in intraday trading, only to recover to a normal level in a month or two.

North Korea’s nuclear test on Oct. 9, 2006 hammered the Korean stock market, which went down 3.58 percent before recovering a bit to close down 2.41 percent at 1,319.40. The index, however, regained its lost ground in the following sessions and stood at 1399.44 a month later.

The second nuclear test by the North in May 2009 played out in a similar pattern that included a quick drop and then a steady recovery.

Last year, the sinking of South Korea’s corvette Cheonan and the bombing of Yeonpyeong Island had only a nominal impact on the Korean bourse, as investors did not opt for massive sell orders on the news.

In New York on Monday, the CDS premiums for the Korean state bonds inched up 9 basis points from the previous session on Dec. 16, registering a smaller-than-expected increase compared with previous fluctuations linked to North Korean threats.

Major credit rating agencies on Monday pledged to keep the rating for South Korea unchanged after Kim’s death was announced, helping form the sentiment that negative impact related to North Korea, as with previous turmoil, might be limited.

Foreign investors sold a net 240.9 billon won worth of shares on Monday and extended their selling on Tuesday, but analysts said the broader picture shows that there is no sign of drastic foreign capital flight on the local bourse as a result of a fresh North Korea risk. Given that the accumulated net selling by foreign investors reached 773.9 billion won from Dec. 1-19, their move is seen more connected to the eurozone sovereign debt crisis.

Foreign investment banks also offered cautious optimism about the Korean financial market. Goldman Sachs said in a report that Kim Jong-il’s death would not have “much immediate impact on the economy of South Korea” as Kim’s health conditions were widely known and both Koreas had prepared for the contingency, and the South Korean government has a contingency plan.

The firm said North Korea’s transition period following Kim’s death is unlikely to affect adversely the South Korean economy, and investors could expect more upside in the medium and long-term outlooks in connection with its unification scenario of gradual integration.

By Yang Sung-jin (insight@heraldcorp.com)