Unquiet on the Eastern Front: North Korea, Nuclear Testing, and Emerging Markets

Unquiet on the Eastern Front: North Korea, Nuclear Testing, and Emerging Markets

By now, you’ve surely heard the news.

On September 9, 2016, North Korea detonated its fifth nuclear device, the latest in a long line of controversial tests that have drawn international criticism.  Once again, the world is up in arms, with strong condemnations from South Korea, Japan, the United States, and surprisingly, even North Korea’s longtime ally, China.

But saber rattling and military flyovers aside, how does this latest test impact emerging markets?  After all, Asia is a hotbed of emerging markets–three of which are situated in Asia: Indonesia, the Philippines, and Vietnam.   

Short answer: it does, but only in the short term. To those who are unfamiliar with North Korea’s bombastic ways, this latest nuclear test may seems terrifying and decisive. But markets are resilient, and while they did suffer some losses and jitters, these are unlikely to be permanent.

South Korea

South Korea, both politically and economically, has historically paid little attention to such provocations, a trend that continues today.

After a previous nuclear test in early 2016, the South Korean market showed little sign of weakening; indeed, as some analysts have pointed out, the South Korean economy was more affected by the sinking of the Sewol ferry in 2014, than it was by North Korean nuclear testing.   

As Foreign Policy notes in the aftermath of North Korea’s fourth successful nuclear test in February 2016, “while Pyongyang’s provocations erode Asia’s security, they do not threaten the region’s economic vitality.”

This may come as a shock to some, as South Korea has the most to lose in case of a war, considering that Seoul, the capital, is within range of North Korean artillery and missiles. But, as one of the most powerful emerging markets in the world, the South Korean resiliency is perhaps their greatest asset.

Still, this latest crisis, had some effect on the powerful South Korean economy: the KOSDAQ fell briefly at the first news of the underground nuclear test, but eventually regained 0.47 percent at the end of the day. In addition, the KOSDAQ did fall to a three month low, but North Korea cannot not take sole credit for this. This drop was likely compounded by Samsung’s exploding smartphone debacle, which was first discovered in early September, and which continues to wreak havoc today.

Latin America and South Africa

North Korea’s nuclear tests did negatively impact other markets, albeit ones further away.  While the MSCI’s Emerging Markets Index lost 1.9 percent immediately after the tests, many of these losses were in distant markets, such as Brazil, Colombia, and South Africa.  Indeed, Latin America was hit the hardest, as the currencies of Brazil, Colombia, Peru, and Mexico all dropped anywhere from 1 to 2%, and their corresponding markets were also negatively affected as well.

Yet if you look back at the statistics and charts posted earlier, you will see that none of these countries are within range of North Korea’s nuclear missiles, which can, at best, reach the northwestern edges of Canada, Hawaii, and Australia.  As such, the recent drops in the Latin American emerging markets can be attributed to a number of factors, and not solely to North Korea’s nuclear testing.

One explanation for the drop in Latin American markets would be a perfect storm of political and economic crises, ranging from falling oil prices across the world to political instability in Brazil.  As oil, the lifeblood of Venezuela’s economy, drops in price, this former Latin American powerhouse has faced widespread food shortages, turmoil, and dissent, leading to an influx of migrants to neighboring Colombia, and a rise in tensions.  Add to that a scathing corruption crisis in Brazil, one which ousted the elected, left-wing government of Dilma Rousseff with the appointed, center-right regime of little-known Vice President Michel Temer, and it gradually becomes clear how and why Latin American markets are taking a plunge.

But perhaps the single, largest factor leading to this temporary lapse in the market was not North Korea, but announcements by Western officials.  On September 8, Boston Fed President Eric Rosengren announced support for an increase in interest rates, given the high-employment in the American economy today.  Coupled with the disappointing uncertainty regarding the European Central Bank’s money-printing program, critical to breaking the dangerous deflation that has gripped Europe since January 2015, and a more complicated, compelling picture emerges.  

A complicated global picture

In and of itself, it is unlikely that North Korea could have provoked such steep, if short-term, drops in multiple global markets.  After all, while North Korea’s nuclear program has reached an important benchmark, they are half-baked, lacking key components in guidance systems and warheads.

The bigger, if less obvious danger, is overreaction. It seems that the only thing that can send our markets into a tailspin is not North Korea itself, but rather, existing crises compounded by a panicky populace.

 

2017-06-19T14:52:47+00:00 September 23rd, 2016|Blog, Finance, Global Markets|0 Comments

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