Will a North Korea-US war hit your trading portfolio?
13:20, 10 October 2017
Donald Trump has said he is willing to go to war with North Korea. “They [North Korea] will be met with fire, fury and frankly power the likes of which this world has never seen before," he told the world.
His remarks, made on 8 August 2017 from a Trump New Jersey golf club, were incendiary and reckless but the strength of feeling behind them was clear.
Any nuclear war in the Asian peninsula would inflict horrific loss of life: 2.1 million could die and another 7.7 million could be injured in Seoul and Tokyo attacks, according a recent 38 North report. A single nuclear detonation over Seoul would likely kill 800,000.
But what would a US-North Korea nuclear strike – the North Koreans insist they will never give nuclear weapons up – do to world stock markets and trading? Which sectors would be hardest hit? And which industries might benefit from any re-building program, post-nuclear strike?
North Korea's weapons stockpile are more sophisticated than thought some claim: Shutterstock.Massive and unknowable ballistic consequences
It’s impossible to back-test or war-game this scenario so it’s not a reasonable question. First, though, some sifting of the ground.
“It [a nuclear hit] would be cataclysmic for global markets,” says Jon Horton from financial planners Chamberlain de Broe. “It’s been 70 years since the last global nuclear conflict. You do have gold as a global store of value. But Bitcoin is out there now too. In an absolute crisis, how would both behave?”
There would be certainly a retreat into sovereign bonds; the nearby Japanese market would likely go into freefall he thinks. “If you irradiate the Japanese peninsula, how would that look?”
A nuclear strike on a first-world economy would have massive consequences for almost all industries: global trade lines are now so inter-connected, including many just-in-time supply chains.
South Korea is now the world’s ninth biggest economy. It accounts for 1.9% of global economic output. Yet its contribution to every-day technological products used across the world is immense.
The North Korean threat to the Asian peninsular will not retreat: ShutterstockSupply chain fear
Around 40% of all liquid crystal displays are made in South Korea and 17% of semiconductors. South Korea is home to major car makers Hyundai and Kia and a big ship building industry.
Much of South Korea’s infrastructure – water supply, electricity, roads, sea and airports – would be severely compromised if not wiped out.
History offers few clues to a potential conflagration. The 1950-53 Korean War saw 1.2 million South Korean deaths and the value of its GDP collapse by 80%. But it was not a nuclear war.
Fast forward to late 2017 and the unknowables with Donald Trump and Kim Jong Un are more or less limitless. It is impossible to reason with both – at least that is the perception.
It is also impossible to predict when war might end, given the potential for escalation as China, and perhaps Russia, are inevitably drawn in. The location of North Korean missiles – including submarine-launch and mobile road-launch – is increasingly sophisticated.
The cult of personality in North Korea is massive: ShutterstockHuge US and Japanese cost
South Korean capital Seoul contains 20% of the country’s population and would likely be a first target (as well as Tokyo, possibly). Seoul is 35 miles from the North Korean border – the distance from central London to High Wycombe, Hertfordshire.
Assuming Seoul took the first hit, the economic impact would be rapidly felt in the US, pushing up borrowing costs. At its peak, in 1952, the US government was spending the equivalent of 4.2% of its GDP fighting the Korean War, Capital Economics estimated recently.
“The total cost of the second Gulf War (2003) and its aftermath,” says Capital Economics, “has been estimated at US$1trn (5% of one year’s US GDP). A prolonged war in Korea would significantly push up US federal debt, which at 75% of GDP is already uncomfortably high.”
The cost of reconstruction would be massive with the US, South Korea’s major ally, likely to shoulder some of the expense (Capital Economics estimates it takes two years to build a semi-conductor factory from the ground up).
The cost of living for some basic raw material supplies in the West – steel and oil, for example – would climb as seaborne tanker trading routes would likely change.
Supply chain and sea trading routes would be deeply affected – and the loss of life catastrophic: ShutterstockDefensive nuke moves
Up to now the rhetorical eruptions between Pyongyang and Washington have had a largely benign effect on stocks – US and Asian stocks remain close to all-time highs – bar some jolts (or presidential tweets).
But in an outbreak of war, history’s safe haven, gold, would likely climb – possibly rocket. There would likely be a sharp rise in the US dollar, Swiss franc and oil stocks, all traditional safe haven asset classes, plus UK gilts, US treasuries and German super-safe government bunds.
Despite Japan’s risk from North Korean attack – at its closest point Japan is a little over 300 miles from North Korea – the yen would likely surge. That’s because Japan has a huge supply of foreign assets.
These funds are generally repatriated in disaster (as happened after the Japanese tsunami in 2011) so propping up the yen. This though would not be a sure bet in a new global calamity.
Precious metals players such as Randgold, Goldcorp, Fresnillo, Silver Wheaton Corp and Buenaventura, would likely rise.
Think infrastructure basics
Inevitably major infrastructure builders would benefit from a massive re-building and decontamination program. It is estimated a nuclear war would take 10-15 years to rebuild South Korea’s economy.
That means resource scarcity stocks – water, sustainable food, healthcare and renewable energy players – would gain from a post-war scenario. Think of the whole value chain: from spigots to pumps to desalination in the case of water.
One weathervane of tension is how South Korean sovereign credit default swaps fare. The wider the spreads, the higher the risk potential is. Also the VIX ‘fear index’.
Protective clothing for some – but the aftermath is still unthinkable: ShutterstockRisk-off tension profits potential
Investors meanwhile may be able to profit from the on-going tensions. “We reiterate our overweight call on Korean equities, and would use the recent sell-off as a buying opportunity,” Ned Davis Research Group recently said.
Up to the end of September 2017 the MSCI Korea Index was up +25.40% (in contrast the FTSE 100 was up +6.4% in that period) and up +32.4% year-to-date.
There remains huge public anger about a lack of accountability and corporate governance in South Korea. The market cap of South Korea’s five biggest companies, including Samsung and Hyundai, dominate South Korea’s stock index by more than 50% via largely family-run ‘chaebol’ clans.
There are moves to improve Korean corporate governance, provided the economy can sustain reform, say analysts. Much of the media meanwhile is influenced by chaebol advertising, limiting criticism and editorial independence.
A Seoul attack may be non-nuclear
North Korea has an estimated 700,000 conventional soldiers (though some think this figure as high as one million) and a 1.2 million military total. Seoul could easily be destroyed without a nuclear attack from North Korea, given Pyongyang’s arsenal of conventional and chemical weapons, including sarin and VX nerve agent, plus biological weapons.
North Korea is thought to have between 20-26 nuclear warheads though this figure may be higher. It has approximately 500 long-range artillery systems, though its gun crew training is thought weak.
Demonstrators against Trump; a North Korean confrontation would likely mean catastrophic loss of life: Shutterstock Even if North Korea is persuaded to ditch long-distance nuclear warheads, it has an arsenal of intermediate range missiles that could strike major population centres in Japan and other Asian countries.
North Korea is on a permanent war footing with compulsory conscription. North Koreans soldiers, some claim, may have built tunnels up to 4-5metres wide under Seoul apartment blocks, though these reports have been difficult to verify.
Despite the massive nuclear threat, Donald Trump’s tone remains belligerent. “We cannot allow this dictatorship [Kim Jong Un] to threaten our nation or our allies with unimaginable loss of life,” he said in early October 2017. “We will do what we must do to prevent that from happening. And it will be done, if necessary, believe me.”
There is a great deal of worry that Kim Jong Un has surrounded himself by 'Yes Men' who fear to challenge: Shutterstock