Market Views: Will Korea gain from Trump-Kim summit?

The historic meeting between the leaders of the US and North Korea may lead to a thawing of political relations but will have limited impact on markets, according to four specialists.
Market Views: Will Korea gain from Trump-Kim summit?

On June 12, US President Donald Trump and North Korean leader Kim Jong-un held a one-day summit at a resort in Singapore, marking the first time the leaders of the two nations have met face to face.

The summit resulted in the signing of a joint statement outlining four key points: a commitment to establishing new US and North Korean relations; an intention to join efforts to build a peaceful regime on the Korean peninsula; an affirmation of the Panmunjom Declaration, which calls for the complete denuclearisation of the Korean Peninsula; and a commitment to recovering and repatriating the remains of prisoners of war or missing in action personnel.

Trump also announced the end of joint military exercises with South Korea at his press conference following the summit.

Reaction to the summit has been mixed, with some observers criticising the vague nature of the statements, while others voiced optimism about North Korea’s willingness to engage at all.

Investors have also been busy analysing the key takeaways from the summit. To assess what market participants made of the historic event, we asked them the following question: "Will the summit have any medium-term impact on Korean and Asian markets?"

The responses below from two market strategists, a chief investment officer and an economist have been edited for clarity and brevity.

Carl Tannenbaum, chief economist

Northern Trust, Chicago

North Korea’s economic development lags that of its neighbors significantly; the country’s infrastructure is well below regional standards.  If conditions allow more normal economic relations with the North, all parties to the negotiations would benefit.

To the degree that the effected countries have a risk premium in asset prices related to North Korean stress, détente would reduce uncertainty and potentially raise asset prices.  And as noted above, regional companies and countries that participate in any renewal of North Korea would prosper.

A positive outcome would also take some pressure off China, which has been North Korea’s main patron. Given China’s economic objectives (including financial reform), the opportunity to redeploy financial resources currently devoted to North Korea would be welcomed.

Uncertainty is typically not helpful for market performance. While this week’s summit is unlikely to eliminate uncertainty surrounding North Korea, any reduction in tensions would be to the benefit of regional markets.

Few think that the two sides will be able to iron out all of the details of denuclearisation on one side and relief from sanctions on the other. But just six months ago, the North was testing missiles and nuclear devices. From an economic and humanitarian perspective, conditions are in a much better place now. And conversation is almost always superior to confrontation.

Dave Lafferty, chief market strategist

Natixis Investment Managers, Boston

Not surprisingly, market reaction was muted, a by-product of vague promises with no tangible changes in policy. Stocks in Asia, Europe, and the US were flat to mixed. With little news coming from the summit, all eyes are watching the Fed and ECB later this week.

The longer-run implications could be positive for markets if the geopolitical risk premium is reduced in the Korean Peninsula. Hopes for some kind of “peace dividend” are wildly optimistic, but anything that brings North Korea out of the economic dark ages should be good for both South Korea and US/China relations.

Asian investors shouldn’t become complacent. Trump and Kim remain highly emotional and notoriously thin-skinned. The modest goodwill coming from the summit could evaporate in a single tweet.  

The US/North Korea summit ended largely as expected. The pre-summit hype and optimism almost guaranteed some broad positive statements, but no substantive breakthroughs could be realistically forecasted. The outcome was mostly just an agreement to lower the tension and continue talking.

However, observers shouldn’t write off the Trump/Kim meeting as purely symbolic. It was the start of a very long road. The turns that road will take will be largely dependent on how serious Kim is about giving up his nuclear dreams. It is still too early to tell if Kim has just borrowed time and legitimacy from President Trump or if this is an actual first step toward denuclearisation. Kim has failed to live up to previous commitments.

Christian Nolting, Global CIO

Deutsche Bank Wealth Management. Frankfurt

I don’t see it being a market driver. Maybe if it goes, let’s say, in the right direction, Trump is not having the same behaviour as he had last week in Canada, and just walks away, then probably markets are okay and don’t react much to it.

If North Korea really agrees to denuclearisation, this could deliver higher approval [ratings] for Trump and give the Republicans a positive push for their mid-term election. 

In the short term, we might see a relief rally and Korean and Japanese equities could benefit from a potential de-escalation.

It's too early talk about long term [implications]. But it could change his approval ratings and the mid-term elections in the US is something we will be watching carefully. But that [elections] happens only in November, so there is some time to go.

Tai Hui, chief market strategist for Asia Pacific

JP Morgan Asset Management, Hong Kong

Relative to its historical significance, investors are watching with passive interest. The Kospi [equity benchmark] closed 0.05% lower [on June 12]. The immediate economic implications from this meeting are marginal. Investors may also have some reservations about whether the US position could shift abruptly. Despite tensions between Pyongyang and Washington in 2017, the South Korean equity market was one of the best performing markets in Asia, as a rebounding global trade cycle boosted corporate earnings. If the market didn't fear last year, they are not going to cheer much now, in my view.

A constructive dialogue is not expected to provide much boost to growth. As the muted market reaction to the difficult G7 meetings show, the policy outlook for the Federal Reserve and the European Central Bank is more significant in shaping investor sentiment in the near term.

The Kim-Trump Summit is undoubtedly a historical milestone. A peaceful dialogue beats threats and confrontation on any given day, so this is a positive development. Given the complexity and historical legacy of this relationship, the summit should be seen as the start of an ongoing dialogue.

As the two sides proceed further in weeks and months ahead, delivering concrete results could potentially get more challenging, such as lifting of economic sanctions, returning hostages held in North Korea and the withdrawal of US military presence in South Korea. China’s role in this geopolitical chess game could complicate matters further.

AsianInvestor will host its 12th Korea Institutional Investment Forum on June 20 in Seoul. For more details contact Terry Rayner via email or on +852 31751963.

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