Pyongyang’s Nuclear Threats Rebuffed by South’s Jaded Investors

N. Korea Conducts Nuclear Test, S. Korean Equities Slide
  • South Korean won pares drop after falling on geopolitical risk
  • History shows stocks recover after North Korean nuclear tests

After North Korea’s second nuclear test this year spurred losses in stock and currency markets in Seoul, investors say the pullback will be temporary.

The Kospi index recorded its biggest drop since July 6 on Friday and the won weakened after Pyongyang’s regime confirmed the nuclear trial was successful. Fund managers including Lee Seung Jun at the $183 billion Samsung Asset Management see little risk of a prolonged selloff, pointing to four past tests that spurred only brief market declines, if any at all. South Korea’s currency has already made up most of the ground it lost.

“North Korea’s nuclear issue has always had a temporary impact on markets,” said Lee. “It’s not an issue that can be solved in the short-term. Today’s sell-off seems to be investors profit-taking on the Kospi after the index recently hit its highest level this year.”

Foreign investors sold a net $101 million in South Korean shares as of 3:01 p.m. in Seoul, after Pyongyang’s regime confirmed the test and said it is now able to produce miniaturized nuclear arms. If true, it would be a major leap for North Korea’s nuclear ambitions marked by its four previous nuclear tests since 2006.

History, however, shows that the reclusive regime’s frequent provocations don’t leave a lasting impact on the south’s market. After the previous detonations in 2006, 2009, 2013 and in January, losses in equities were short-lived, with the measure closing the year higher in each of those years. The gauge has jumped 5.8 percent since Jan. 6, when Pyongyang said it tested a hydrogen bomb. The bomb was never verified and some nuclear experts and the U.S. cast doubt on the claim.

While the south’s equity measure and currency fell in the morning as speculation mounted the reported earthquake was a nuclear test, both came off their lows in the afternoon with the won closing at a similar level to just before the tremors were first felt.

Investors and analysts note that there were other factors that led to Friday’s drop, including concern valuations were too high after the Kospi touched its highest level since July 2015 on Tuesday. The measure was already retreating before the stream of news reports on North Korea started to hit the wire. The benchmark measure tracked a retreat in Asian stocks after the European Central Bank downplayed the need for more economic stimulus and Samsung Electronics Co. paced a decline in technology shares.

While the news from Pyongyang “may have aggravated the weakness today, I think that it is more to do with the disappointment expressed by investors on the lack of QE program extension by the ECB,” said Khiem Do, the head of multi-asset strategy at Baring Asset Management (Asia) Ltd.

For the South Korean currency, the nuclear test increased the level of alarm felt by the market, said Kim Dae Hun, a currency trader at Busan Bank in Seoul. The won fell as much as 1 percent after the news and has since pared losses to trade at 1,098.15 against the greenback. 

“The fall in stocks and the foreign outflow from the equities market pressured the won further today,” Kim said by telephone. “The won instantly weakened after the news came out, though it has stabilized somewhat since. I don’t think its negative impact will last long though.”

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