By coincidence, AsianInvestor magazine had a business trip to Seoul last week, landing the day after North Korea conducted its underground nuclear test. Although it was business as usual throughout South KoreaÆs bustling capital, the inevitable topic of conversation was politics, and the potential impact the crisis could have on investments.

For fund managers, the main question is to what extent political fears could impact the stock markets. Most remain sanguine. One fund executive pointed out that last Monday the Kospi fell by only 2.5%, compared to a 10% drop on September 12, 2001.

A number of fund executives pointed to the marketÆs greater stability, thanks to nearly three years of banks promoting regular savings plans into Korean equities. Sales of new plans have tapered off after the summer market correction, but existing plan holders continue to diligently file their monthly investments.

There is no sign that a geopolitical scare will lead to redemptions. Over this weekend the United Nations Security Council passed a resolution to punish Pyongyang for carrying out its tests but explicitly ruled out the use of military action. That should calm nerves in Seoul. But fund managers arenÆt quite out of the woods. The political crisis isnÆt over.

The rule of thumb mentioned last week in Seoul is that if the UN resolution immediately leads to a new status quo, there will be no impact on the markets. If the crisis continues for a few weeks, with uncertain reactions by North Korea, continued sabre-rattling by the United States and a wishy-washy Chinese response, it is likely to depress stock prices but have no real impact on the economy. And should events remain tumultuous as far as the end of December, local analysts worry about a substantial effect on the market.

For domestic institutional investors, the risk is a prolonged political crisis that will slow down economic growth, and prompt the Bank of Korea to cut interest rates. Insurance companies, for example, would prefer to see interest-rate rises. Both life and general insurers continue to grapple with negative spreads from legacy policies sold in the days of high interest rates.

When the BoKÆs overnight call rate fell to as low as 3.25% in late 2004, insurers struggled to make returns on their investments in domestic bond markets. Since then rates have steadily risen to 4.5%, which has allowed insurance companies to narrow or close the gap. Another rate cut, however, would complicate this recovery.

ôIf uncertainty keeps rates low, our long-term bond investments will be damaged,ö says Kim Jong-woo, asset-management team vice president at Samsung Fire and Marine Insurance, which has W1.6 trillion ($16 billion) of assets under management.

Of course, such uncertainty or economic weakness could as easily come from, say, a drop in American imports as much as political problems. But investors living on the divided Korean peninsula continue to live with an additional political risk.