AFR: Are asset bubbles growing in Asia?
20 November, 2010
Go Tell It On The Mountain: Kinabalu
1 December, 2010Asiamoney.com
The exchange of fire between the North and South Korean military yesterday has made market bears especially nervous. It’s easy to see why: the Korean situation could very easily escalate, and it’s natural that markets would underperform in the shadow of that uncomfortable prospect. Both world markets and certainly Korea’s own bourse, you would think, should suffer.
Strangely, though, history tells a different story. When flashpoints have happened in Korea over the last five years, the local market hasn’t been impacted at all, either in terms of outright performance or in the behaviour of foreign portfolio investors.
Korea Exchange has compiled some data on this theme to illustrate exactly what happens to the market when North Korea tries sabre-rattling. Generally, in the day or so after an event, things are choppy, but they return to normal with surprising rapidity.
The three most uncomfortable moments in North-South Korean relations prior to yesterday’s artillery strike were the two nuclear missile tests in October 2006 and May 2009, and the sinking of the South Korean warship Cheonan in March this year.
With both missile tests, they were known to be happening in advance, and foreigners had ample opportunity to take flight if they wanted to. But that didn’t happen. During the Daepodong missile test in 2006, foreign investment was net positive by US$496 million on the day of the test. On the day of the second test, in 2009, it was also positive, by US$170 million. In terms of local market performance, the KOSPI index was back above the level before the test within three trading days.
The Cheonan sinking is perhaps a more accurate comparison since nobody knew it was coming, like yesterday’s strike. But here, too, the market behaviour is surprising. On the first trading day after the sinking (which took place at 9.30pm the previous night, well outside trading hours) foreign investment was net positive by US$289 million. And KOSPI was back above its pre-Cheonan levels within a day of the sinking being publicly known.
Today, the KOSPI index opened about 2.5% down on the previous close (news of the strikes came very late in the Korean trading day yesterday) but if you take a look at the index performance through the day, it describes a steady upwards path: at the time of writing it looked likely to close flat on yesterday’s close having recouped its losses in the space of a few hours. Traders in Korea say net foreign portfolio investment has, once again, been positive.
Why? There are two interpretations. One is that since nobody appears to want a war, the assumption is that one will be averted. The presence of the US and China as allies to the various sides is geopolitically imposing, and so formidable that it may well stop outright conflict. The other interpretation is that even if fighting does commence, it is not expected to be particularly damaging to the South Korean economy.
If anything, the impact appears to be bigger on world markets, just because Korean uncertainty is something to be added to the debit side of the ledger on risk. There is a whole raft of ingredients in the mix here: Ireland; European sovereign debt generally; tightening of Chinese bank lending policy; worries about quantitative easing. Korean tension gives another reason for risk appetite to leave the market. Those who were already uncertain see in it a deciding factor, a pivotal moment in shaping their decisions to be in or out of the markets.
ANZ noted yesterday: “The North Korean situation has overtaken everything.” With the odd exception, it seems, of the Korean markets themselves.
