Market Overview

Could These Companies Benefit from Change in North Korean Leadership?

The news of the death of North Korea's long-term dictator, Kim Jong-Il, hit the Internet late last night. North Korea has been probably the most closed society and economy in the world and the foreigners have had a very limited access to the country. Kim Jong-Il or “Dear Leader” ruled the country for 17 years after his father died in 1994. Under his tenure, the country suffered from continuous famines, which eventually led to minor economic reforms.

It is expected that Kim Jong-Il's son, Kim Jong-un, will be appointed as the successor of the former leader. Kim Jong-un reportedly studied in Switzerland in the late 1990s, which could make him more internationally oriented than his father or grandfather and apt to open the country's economy in ways China has done. This might be good news for the investors, as the increased economic openness may provide lucrative investment opportunities.

Especially, the South Korean companies might benefit greatly from the increased openness. It could provide an opportunity to move some of the production to North Korea, where the wage level would be significantly lower. For example, LG Display Co (NYSE: LPL) and POSCO (NYSE: PKX) could see higher bottom line growth, if they are able to bring down their productions costs.

Additionally, the in the long-run the increased economic activity could also provide an opportunity for the South-Korean companies to start exporting goods and service across the northern border. This naturally could boost the companies top line growth. Some of the companies that could see benefits are KT Corporation (NYSE: KT), SK Telecom Co., (NYSE: SKM), and Hyundai Motor Co (OTC: HYMLF).

The traders should be cautious though, as it is unclear whether North Korea's new leader will bring any economical reforms. Also, it is possible that Kim Jong-un will face a power struggle, as Kim Jong-Il's other sons or senior military leaders might be looking for a chance to become the new dictator. This could lead to serious unrests in the region and the traders and investors should focus on the companies that do not have much exposure to the Korean peninsula.

Benzinga's real-time news service, Benzinga Pro, will follow the developments in North Korea very closely.


ACTION ITEMS:

Bullish:
Traders who believe that the change in the North Korean leadership will increase economic openness might want to consider the following trades:
  • Go long South Korean companies
  • Go long iShares MSCI South Korea Index Fund ETF (NYSE: EWY)
Bearish:
Traders who believe that the change in leadership will cause conflicts in the region may consider alternative positions:
  • Short the South Korean Won
  • Invest in the U.S. companies, such as DTE Energy (NYSE: DTE) that do not have any exposure to the region.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

You can follow me on twitter @TuomoKallio.

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