What the Death of Kim Jong Il Means for Investors

It is too early to know what will be the fate of North Korea following the death of its “beloved great leader”, Kim Jong Il. For now, markets around the world (especially in Asia) are down amid uncertainty surrounding his succession. But markets are largely expected to calm over the next few days as Kim’s 28-year-old son, Kim Jung Un, takes full control of the country. While little is known about Un, his youth and international experience could be just what the nation needs to shake off its reclusive past and enter the world economic community.

There has only been one leadership succession in North Korea. Back in 1994, Kim Jong Il took over for his father Kim Il Sung, who ran the country for nearly half a century. There were some high hopes for Kim Jong Il to finally drag North Korea out from the shadows. But with every step forward, it seemed that the nation took two steps back.

But one of the positive political and economic developments under Kim Jong Il’s rule was the re-establishment of limited political and economic ties with its neighbor/bitter enemy South Korea. Under the “Sunshine Policy,” North and South Korea created several joint-owned business ventures. The Kaesŏng Industrial Park was created in 1994 as a special district in North Korea that would make goods for export through South Korea and out to the rest of the world. Your new snazzy Hyundai is one of the many South Korean products that are being made in North Korea.

Kaesŏng represented the best of the Sunshine’s economic policy. It was supposed to be replicated across the North but political fighting between the two Koreas put the brakes on any further cooperation.

The Way Forward

Kim Jung Un could change all that. He has not lived very long in North Korea, spending his formative years in Switzerland attending a prestigious foreign boarding school. Un was friends with international kids from around the globe, which must have had an effect on his world view. Throughout junior high, Un learned about democracy and capitalism, so he is not ignorant to the outside world.

Coming back to North Korea last year after so much time in the heart of Europe must have been like entering a time warp for Un. The country’s technological level is equal to that of the 1950s. Power in the capital Pyongyang goes out often as the country’s electrical grid is antiquated. In the city, one of the world’s tallest buildings, the one-hundred-and-five-story Ryugyong Hotel, sits in the shadows, unfinished for nearly two decades, acting as a reminder of the nation’s economic woes.

Kim Jung Un inherits a backwards and broken country, but he can do something about it. While the county’s centrally planned economy teeters on the edge of collapse, the country has great untapped potential. It has a dedicated population that seems to be obsessed with doing the leader’s bidding. It has an abundant mineral resource base which Goldman Sachs valued in 2009 to be worth around 140 times the nation’s 2008 GDP. Further economic integration with South Korea could lead to a gradual increase in living standards. Goldman Sachs estimates that full integration of the two Koreas would eventually lead to a nation with a GDP that could be on a par with, or in excess of, that of most G-7 countries by 2050.

What Investors Should Watch

The companies that will be on the forefront of any liberalization of North Korea will naturally be from South Korea. Therefore, one way to play this trade would be to invest in the equities of South Korean companies, especially those that already have ties with the North.  The Korean Exchange’s benchmark KOPSI index settled the day down 3.43% on news of Kim Jong Il’s death as investors fled in panic. Now could be a great entry point to get in on any long-term growth potential with the North. Hyundai, for example, which operates in North Korea, fell as much as 10% today.

South Koreans are largely against a German-style rapid reunification with its neighbors to the north as the living standards between the two Koreas are so vastly different. Gradual liberalization of trade, which would allow North Korea’s living standards to rise gradually, may be the best way for the peninsula to finally rip down the walls and come together.

Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati