In a somewhat surprising move, during his New Year's Day policy statement, North Korean leader Kim Jong-Un said:
A key to ending the divide of the nation and achieving reunification is to end the situation of confrontation between the North and the South. A basic precondition to improving North-South relations and advancing national reunification is to honor and implement North-South joint declarations.
While it is often said that "talk is cheap" I am optimistic that Kim Jong-Un is serious about improving relations with South Korea. This move makes sense for a variety of reasons. Firstly, if tensions between North and South Korea decline, then North Korea will be able to spend less money on its military and more money on improving the economy. Furthermore, it seems as though Kim Jong-Un is also serious about implementing much needed economic change:
Let us bring about a radical turn in the building of an economic giant with the same spirit and mettle as were displayed in conquering space.
The best way for North Korea to improve its economic situation is to end its failed policy of isolation. In truth, the changes that need to be made to ensure a more prosperous North Korea will be made over decades, not years. Nonetheless, the new tone from the new North Korean leader is quite encouraging.
Famed investor, twice world traveler, author, and former hedge fund manager Jim Rogers has said that he expects North and South Korea to merge within 5 years. At the time when Rogers made these comments, following the death of former North Korean leader Kim Jong-Il, this predication seemed impossible. However, the recent comments from the new North Korean leader make Rogers's idea seem a little less crazy.
Will North and South Korea merge anytime soon? I doubt it. While North and South Korea may eventually come together, I think that would require many years of improving relations between the two nations. That being said, I view the new tone as a major positive for the region as a whole.
Over the past few decades, the biggest threat to the growing South Korean economy has been a North Korean forced military conflict. Now, with the likelihood of such a conflict on the decline, South Korea is a safer place to invest. Of course, this can change at any moment if the political climate in the region changes. The best way to play the improving political climate in the region is via the iShares MSCI South Korea Index Fund (NYSEARCA:EWY).
As shown by the chart below, South Korea has been one of the best performing stock markets in the world over the past 10 years.
It is important that investors act now and gain exposure to EWY before real change occurs within the region. By the time it is obvious that change for the better is coming to Korea, the market will have likely already made a major move. If North Korea follows up its words with actions, expect institutional money to flow in South Korea as the biggest risk to the market there will have been minimized significantly.