Political risk update on North Korea

Two scenarios for the regime change

We believe the transfer of power in North Korea could pan out in two ways. Given Kim Jung Eun’s young age and the short time period for the succession (a little over a year), we believe the power transfer could lead to either a stable regime change or one that involves heightened tensions owing to increased friction within the inner circle. In either case, we believe that a resolution is not possible in the short term.

Situation now is different from the death of Kim Il Sung

When news of Kim Il Sung’s death was announced back in 8 July 1994, the KOSPI index actually finished up 0.3% higher before moving sideways for the next two months. We believe the key difference from the previous succession is Kim Jong Eun’s age and the short time period for the succession. Also, with the rising power of the military faction in the government, we believe uncertainty remains and so a regime change is likely to take more time this time around.

Potential for war is low

Post announcement of Kim Jong Il’s death, major countries surrounding North Korea have engaged in emergency meetings and have raised their military alert levels. Given the military and economic ties between the major powers, we see the possibility of the outbreak of a war to be low.

Expect increased volatility, but limited downside risk

We believe the death of Kim Jong Il would add increased volatility, in addition to the current uncertainties surrounding the EU. However, further downside risk would be limited, in our view, as we do not envisage the current situation to turn into a real crisis. We would like to also highlight that foreign investors have been major sellers of Korea all year, so this event happens at a time when foreign ownership of the KOSPI is already low.