With a background as a passive equity fund manager and quant research assistant, Ed Wiltshire joined Aviva as a portfolio manager on a number of our Asia Pacific and Emerging Market equity strategies. In this article, Ed talks about what the tumultuous relationship between Donald Trump and Kim Jong-Un means for their respective nations’ economic markets – and the global knock-on effects.
At those moments in the past 18 months when President Donald Trump and North Korea’s Supreme Leader Kim Jong-Un engaged in a high-stakes game of chicken involving the threat of nuclear missiles, the idea of an agreement between these supposedly irrational and erratic leaders seemed a distant prospect.
Yet while a complete thawing of relations between the two countries may be a stretch, these unlikely dance partners should at least be able to manoeuvre their respective states back to a stable equilibrium.
Kim: from pariah to peacemaker
Having seen the fate of Saddam Hussein and Muammar Gaddafi, Kim Jong-un (and his father before him) could see the obvious dangers of being a dictator who did not enjoy the friendship of the US. North Korea’s desire to develop nuclear weapons was an entirely rational response to protect the current regime: the failure of successive US presidents to nip this ambition in the bud has meant that Donald Trump has been left holding the parcel now that the music has stopped.
With his nuclear programme near to completion, Kim is in a strong bargaining position. Meanwhile, Trump wants to reassure his supporters, preferably before the midterm elections in November, that Kim is no threat to the mighty US. Kim wants an end to sanctions, supported as they are by the Chinese, so that he can attempt to rebuild the North Korean economy. China would like to see a troublesome neighbour brought to heel and no longer be an additional irritant in the already testy Sino-US relationship. Both South Korea and Japan would like to avoid the risk to their citizens of overflying test missiles.
Easing market jitters
So what is the prize for financial markets if a deal can be reached? While it may be some time before anyone rushes to snap up shares in North Korean telecoms company Koryolink or the Pyongyang Chewing Gum Factory, international investors should see some definite near-term benefits. First of all, a major geopolitical risk, one that could potentially have led to war, will have been taken off the table. It has certainly been the case that every test carried out by North Korea and every rhetorical response from Trump’s twitter account have caused global equity markets to flinch.
Unsurprisingly, this has been particularly evident in the oscillations of South Korean equities. Geopolitical stability on the Korean peninsula could translate directly into more stability for the local equity market. Economic co-operation between North and South could be another huge prize, opening up a market desperate for infrastructure improvement to the construction and utilities companies of South Korea.
The biggest near-term prize could be the restoration of good relations between China and South Korea, which had soured due to developments in the North.
If Trump and Kim’s dream of a Nobel Peace Prize may seem a little over-optimistic at this point, it is possible to believe some sort of deal will be reached. Not full denuclearization perhaps, but something that reassures all interested parties – the US, China, South Korea, Japan – Kim’s toys will remain in their box and the expertise his regime has gained will not be sold on to the highest bidder. A reluctant acceptance then that North Korea is now a member of the nuclear club and willing to be a responsible one. In return, sanctions could be lifted and Kim would be free to engage in the world economy and, where possible, normalize his regime’s relationship with other countries. The hermit kingdom could finally come out of its shell.
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