A South Korean Peace Dividend? Financial Advisors' Daily Digest

by: SA For FAs

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The big geopolitical-cum-investing question is whether the Trump-Kim peace summit was for real and thus whether a consequent lifting of military risk from the Korean peninsula will make cheap South Korean (NYSEARCA:EWY) stocks a genuine bargain.

I don’t think anybody, including North Korea’s dictator Kim Jong Un, whose innermost intentions are a key part of this puzzle – knows the answer for sure. In an article on today’s Seeking Alpha, Rob Marstrand expresses this uncertainty, albeit with a cautiously optimistic tilt.

The latest developments are certainly positive, but I'd like to see some concrete actions before sounding the ‘all clear’ sirens.”

While waiting for these concrete actions, he goes on to offer an analysis of the investment value of South Korean stocks, which he generally regards as a pretty good deal in today’s markets, pending clarification of the political situation:

The MSCI Korea Index still looks on the cheap side. At the end of May, it had a price-to-earnings (P/E) ratio of 9.9, a price-to-book (P/B) ratio of 1.1 and a dividend yield of 1.9%. That dividend yield is about the same as the S&P 500 index. But the P/E is just 40% of the US index and the P/B is 32%.”

The deal thus to be had may even warrant “dipping a toe” while “waiting for more concrete progress,” he says.

My own conclusion is more or less the same. Here’s why. First, based on my reading of modern history, communist dictators are inherently untrustworthy. Most historically cognizant people understand that a love of peace is not a motivating factor for such regimes, which support their own monopoly of power through brutal suppression of their own people, and with unspeakable levels of mass murder to demonstrate their resolve in this regard.

And yet other factors have at times motivated communist regimes to undertake reforms, such as the profound erosion of Soviet economic strength that impelled glasnost and perestroika under former rulers Mikhail Gorbachev and Boris Yeltsin. That the North Korean economy could use a lift from starvation levels of sustenance is not new and not my reason for thinking this deal could be legit. As I’ve written previously, it’s only the fact that North Korea’s censorious regime has been willing to share the news of its summit that encourages me to think that progress is possible. In the past, North Korea has been all too willing to make deals with the West and with South Korea, while keeping a tight lid on the flow of information. But as the Washington Post Tokyo bureau chief’s Twitter feed makes clear, North Koreans have been shown images of Singaporean affluence that “North Koreans can only dream about.” It is for that reason that I wrote above that even Kim may not understand where this can lead to. Starving people may not allow him to not deliver a better life, which South Korea’s business community appears prepared to help deliver through joint ventures and the like.

One other factor that makes this all seem plausible is that just one year ago, the U.S. and North Korea were ready to go at each other with nukes. An understanding of the risks of conflict would seem to be a necessary precondition to a change of perspective for Kim, in contrast to more than two decade of U.S. bribes that only encouraged Pyongyang’s rogue behavior.

If you’ve followed me up until now, then you understand that I am not saying that peace will break out – only that peace could actually ensue, whereas the normal expectation would be not a chance. And for that reason, Marstrand would appear to be correct that South Korean stocks could indeed be a bargain worth putting on your watch list.


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