December 21, 2011
On 19 December 2011, the Korea Stock Exchange Index (KOSPI) fell 4.2 percent on news of the death of Kim Jong-Il and ended the day 3.43 percent down. On 20 December 2011, the KOSPI traded modestly higher following gains from the technology and the automobile producer sector with the majority of analysts forecasting additional support for the market on 21 December 2011.
Geopolitical risk associated with North Korea is often cited as a significant influence on South Korean markets and the wider economy. However, the death of Kim Jong-Il demonstrates once again that the impact of geopolitical risk on the South Korean economy remains limited in both duration and impact.
A review of geopolitical events in North Korea since the death of Kim Il-Sung in July 1994 demonstrate both limited duration and impact. The death of Kim Il-sung resulted in an initial drop of 2.11 percent before closing down 0.8 percent. West Sea maritime incidents in 1999 and 2002, saw a drop of 2.71-3.9 percent with recovery to normal levels in five to six weeks. Nuclear tests in October 2006 and May 2009 resulted in drops around the range of 3-4 percent before recovering to close down 2-3 percent, with recovery to normal levels around four weeks later. The Cheonan and Yeonpyeong Island incidents resulted in minor drops and immediate recovery.
However, 2011 has been a highly volatile year for Korean markets. Historically, from 1980 until 2011 the KOSPI market value averaged 748.36 points reaching an historical high of 2228.96 points in May of 2011 and a record low of 93.10 points in January of 1981. In 2011, average movement of the KOSPI on a daily basis reached 1.23 percent, up from 0.73 percent in 2010. This is a volatility level higher than other major markets including the US (0.95 percent), United Kingdom (1.01 percent), Japan (1.06 percent) and India (1.06 percent).
External factors weigh heavily on the KOSPI. In 2011 these have included the ongoing euro zone sovereign debt crisis and the political impasse and continued negative economic indicators affecting the US economy. In addition, Korea’s two key markets, the KOSPI and KOSDAQ have relatively high stock liquidity ratios indicating that investors are actively involved in frequent share trading on a short-term basis to capitalize on market vulnerabilities and fluctuations, rather than a mid-to-long term basis.
As significant as the death of Kim Jong-Il may seem in the context of constant ongoing media coverage, the impact on the South Korean markets is proving limited in both duration and impact. It is a good time to remind oneself that external factors, including the ongoing situation in Europe and the United States are substantially more significant.