North Korea’s underground “mini” nuclear test may have rattled the financial markets. But financial history has shown that short term market dips directly following the defiant DPRK’s provocative acts often lead to buying opportunities.
This is assuming that a “black swan” event does not occur in which a small provocation can escalate, purposely or accidentally, into a larger-scale conflict.
Shares of defense companies skyrocketed by the daily limit of 15 percent at the news of the North’s test. Shares of Speco jumped by 15 percent and closed at 3,795 won. Victeck surged by 14.94 percent to close at 2,500 won and Firstec closed at 2,495 won, up 13.41 percent.
Here’s a recap of North Korea’s recent provocative acts, and how the financial markets have dipped and then strengthened (based on publicly available sources).
DPRK’S NUCLEAR TESTS:
– North Korea’s third nuclear test yesterday (2/12/2013): had a minimal impact on the South Korean stock market. South Korea’s Kospi closed at 1,945.79 at 3 p.m. yesterday, down 5.11 points from Friday. (The market was closed on Monday for the Lunar New Year holiday.) During the day, the Kospi slipped slightly by 0.08 percent to 1,949.39 at 12:10 p.m. after news reports that the South Korean government detected man-made seismic activity in North Korea’s North Hamgyong Province at 11:58 a.m. The test also had meager influence on the local foreign exchange market as foreign dealers said the Korean won depreciated to 1,095,8 won against the dollar at 12:17 p.m., but rebounded to 1,091.25 won at 1:11 p.m. and closed at 1,090.80 won yesterday.
– North Korea’s second nuclear test on May 25, 2009: the Kospi plummeted as much as 6.31 percent during trading hours but it recovered to 1,400.90, down 0.2 percent from the previous day. In the three months after that test, the Kospi jumped by 20 percent and reached the 1,600-something level.
– North Korea’s first nuclear test on October 9, 2006: KOSPI fell 2.41% but was up 0.96% ten days afterwards;
DPRK MISSILE LAUNCHES:
– Launching of Kwangmyongsong-3 on April 13, 2012: KOSPI gained 1.12% on launch date, but was down 0.57% ten days after the launch (relative to the KOSPI on launch date)
– Launching of Kwangmyongsong 3-2 on December 12, 2012: KOSPI fell 0.55% on launch date, but was up 1.65% ten days after the launch (relative to the KOSPI on launch date)
– Death of Kim Jong-il, former DPRK leader, announced in December 2011: the Kospi shed 4.86 percent during trading hours but finished at 1,776.93, down 3.43 percent. The Kospi subsequently gained 10 percent and reached the 1,915 level just a month after Kim’s death, market observers said.
– North Korea firing of artillery shells at South Korea’s Yeonpyeong Island on Nov. 23, 2010: the Kospi managed to rebound just three days after the attack and it jumped by 8 percent a month later.
So as a possible investment strategy, when the “herd mentality” and “group think” of the markets are exiting (selling), one low risk strategy would be to buy i.e., be greedy when others are fearful.
For a clip of Jasper Kim (founder, Asia-Pacific Global Research Group) featured on Bloomberg TV on this topic, see below: