The Winter Olympics have seen icy relations begin to thaw on the Korean peninsula – something that did not seem at all likely late last year as the North launched a missile capable of hitting the US mainland. But how attractive would a unified Korea be as an investment opportunity?
Earlier this month, some 50 miles away from the most heavily fortified border wall in the world, in frigid temperatures, North and South Koreas marched under one flag – a blue united Korea on a white field.
This small act at the Winter Olympics could be viewed as trivial. It is in stark contrast to the last time Korea held the games in 1988, when in the run-up agents of the North Korean government blew up a passenger aeroplane en route to the peninsula, however.
‘As unlikely as it seems, and despite the recent isolationist rhetoric of North Korea’s president Kim Jong-un, the 2018 Winter Olympics could witness the first steps towards the reunification of the Korean peninsula,’ said Ben Surtees, manager of the Jupiter Asian fund.
Surtees is not alone, John Malloy, an emerging markets fund manager at RWC, also sees a move towards one nation.
‘Deep down, in places hidden from plain view and sentiment concealed under layers of pride and prevailing political current, Koreans want to be united.
‘They are truly one people, and often even one family, torn apart by one of the biggest travesties of history – a grave miscarriage of ideology.’
Reunification is not only attractive to families sundered since the end of the war 1953. The prospect of a united Korea could provide positives for investors too.
‘There could be long-term benefits,’ said Surtees. ‘North Korea possesses numerous mineral deposits, including coal, that have provided some energy independence. They also have a large pool of cheap labour keen to work, which domestic South Korean companies would be able to draw on.’
Malloy notes that South Korea’s workforce is expected to fall to 26 million by 2040 from today’s 36 million, while the labour force in the North stands close to 20 million and is only expected to decline marginally over the same period. This could provide a much needed boost to working age demographics.
Surtees added that the combined country would also open up trade routes from Seoul to Beijing, and then on through to Moscow and the Middle East.
‘All these new routes would reduce the reliance on trade with the US and Japan, whilst allowing the country to better promote its exports in markets in which it has traditionally struggled, such as China,’ he noted.
Expanding on existing investments
Malloy also sees a number of positives that reunification would bring.
‘Bottom-up, at RWC, we continue to seek and find compelling investment opportunities, some of which lend well to a reunification scenario,’ he said.
‘We have invested in infrastructure, retail and technology themes, which would certainly benefit from a longer-term reunification effort between North and South Korea. Clearly we need to balance between near-term growth catalysts absent any reunification, as well as the potential optionality of any favourable reunification developments, which limits the level of “dream” we can practically infuse into our Korean portfolio.’
RWC’s head of research Anil Tewari and Cem Akyurek, head of macro, offers Samsung Engineering & Construction as an example of a recent investment. Beyond being involved hydrocarbon and refining plants globally, it is heavily engaged in the construction of factories, technology plants and power stations within Korea.
‘As construction will clearly be a big driver of any reunification effort, we feel Samsung E&C will not only benefit from rising oil prices and globally increased capex in refining capacity; it provides strong optionality on any reunification developments,’ Tewari and Akyurek said.
Mark Williams, Asian equity fund manager at Liontrust, has recently increased his fund’s South Korean weighting to 10% – the highest since launch and his third largest country exposure. However, he cautions against relying on unification as an investment thesis, given the ongoing uncertainty around developments.
‘Our four Korean stocks include Samsung, one of the official partners for the Games, but our increased conviction in South Korea as an investment destination has nothing to do with thawing links between North and South Korea and everything to do with corporate improvements in South Korea,’ he said.
Surtees also says the biggest reason South Korea trades at a discount to many of its emerging markets peers is corporate governance concerns, rather than the North Korean threat.
He sees South Korean companies as still being plagued by boards lacking independence and other questionable business ethics. He also questions how burdensome absorbing its northern neighbour would be on Seoul’s economy.
‘The importance of better governance is, however, overshadowed by the question of a hypothetical reunification of the two Koreas and the impact such a move would have on South Korea’s thriving economy,’ pointed out Surtees.
The most recent example of a successful effort is that of East and West Germany, he notes.
‘Looking to historical comparisons, the only true like-for-like example we have is the reunification of East and West Germany in the 1990s,’ Surtees said.
Malloy also sees the similarities and highlighted: ‘There will be growing pains as the process takes shape, along with the obvious long-term opportunities afforded by such an event. The Berlin Wall officially came down on 9 November 1989, driving significant opportunities and challenges for a newly reunified Germany.’
Unfortunately, Surtees thinks Korea would likely face even greater challenges.
‘North Korea is considerably bigger than East Germany, home to roughly 25 million people. Alongside that, the income disparity between North and South Korea is even more significant. The average income per person in North Korea is just under 5% of the average South Korean income. This means that, for South Korea, reunification could simply mean replacing the threat of war with the threat of economic peril.’