Which sectors and companies will stand to benefit in the wake of the recent historic meeting? We give our take
Overheard in a CBD elevator on 12 June:
Person A: “Did you know the World Cup is starting again? Who are you supporting?”
Person B: “The World Cup is here? How come there isn’t much (news) in the papers yet?”
Well, there’s a simple answer for that.
Adversaries since 1950 whilst on opposite sides of the Korean War, sitting leaders of both nations have never met. Tightened global economic sanctions on North Korea, recent developments in the North’s nuclear program, as well as diplomatic efforts by all sides since the 2018 Winter Olympics in Pyeongchang led to this meeting.
The outcome, a joint statement signed by both leaders committing to peace, is widely viewed as a positive start to what is expected as a long diplomatic process ahead.
Where Do We Go From Here?
Follow-up diplomatic engagement will be led by the US Secretary of State Mike Pompeo, as well as a “high level North Korean counterpart”.
This is likely to be as much a trust-building exercise between all parties, as it will be about the brass tacks of nuclear disarmament, and the removal of UN sanctions on the North.
As noted by summit participants, the Korean DMZ is one of the last remaining relics of the Cold War. A North-South peace treaty would be invaluable in securing regional security in the 21st century.
North Korea’s Industrial Potential – And The Potential Benefactors
North Korea boasts a young, disciplined workforce and vast rare mineral deposits. But its infrastructure is underdeveloped. How would peace, and the lifting of economic sanctions, work out?
Immediate benefits are likely to accrue to either Chinese or South Korean companies. Apart from geographical proximity, political links between China and North Korea, and cultural/linguistic commonalities with South Korea are significant.
China has recently been exporting its capabilities in infrastructure development globally via a turnkey approach.
In this model, the Chinese government funds the development of roads, railways, ports, etc in Asia, Africa and Latin America. The actual work is done by Chinese companies (possibly state owned) who may ship in their own skilled labour force.
Structured as a loan to the host country, Chinese construction companies may get paid directly by the Chinese government for their work in the short term.
The Chinese government will then structure loan repayments from the host country via a government-to-government agreement. These could also be funded by the Chinese-created and -supported Asian Infrastructure Investment Bank (AIIB).
In April’s meeting with South Korea’s President Moon Jae-in at Panmunjom, Chairman Kim alluded that Moon could find the North’s transit infrastructure lacking.
China’s strengths in infrastructural development, as well as its willingness to finance such development in the short term is therefore tailor-made for this situation.
Overall winners are likely to be Chinese construction companies, especially those with prior work or relationships across the border.
Prior to the imposition of tightened sanctions in 2016, North and South Korea had a small amount of trade going. This was focused in the joint North-South Gaeseong industrial complex, which has been shut since 2016.
Incoming foreign direct investment from the South is likely to be orders of magnitude greater than this in the event of a peace treaty and lifting of sanctions.
Assuming that foreign property rights in North Korea can be made secure, likely winners will be companies that can best leverage on the North’s young and disciplined workforce to increase their own production.
Among Korean conglomerates, those in light manufacturing come to mind.
South Korea also has a significant construction industry, e.g. Lotte and Hyundai. Given the scale of infrastructure to be developed, it is likely that there will be opportunities even with China in the picture.
Projects involving North-South transportation infrastructure (e.g. roads, railways) might be more conveniently handled by the South’s companies. On this front, Hyundai has been known to work on high-speed trains and rail vehicles.
Global markets for minerals and rare earth metals bountiful in the North may also experience a US$6 trillion ($8.1 trillion) windfall.
Although this could somewhat depress rare metal prices, look for downstream supply chain benefits in industries that consume these metals (e.g. semi-conductors, tech hardware).
Tourism and Cultural Potential
A North-South peace treaty is likely to bring global attention to both Koreas.
If and as the North opens up, regional tourism may benefit from heightened global awareness. This includes hotel and property chains in the South, whose more developed transportation links to the international community may make it both a first stop for adventure seekers heading up North, as well as a legitimate destination in its own right.
The Panmunjom village at the Korean DMZ might also see a surge of visitors given its newly acquired historical significance. Additionally, Mt. Geumgang in the North has historically been popular with Southern tourists.
Similarly, Korean cultural exports (e.g. television dramas, K-pop groups, food) may also benefit from the entire peninsula being the foci of global awareness.
Real Estate Potential
Investments in real estate are typically a general long-term play on rising economic conditions in a region. This sounds exactly like what the doctor ordered for investors hoping to benefit from ‘catch-up growth’ in North Korea.
Caveating this is the fact that foreign private property rights are still unclear in the North. You can sidestep this by investing in property near the border in South Korea or China.
As with any real estate investing, proximity to major transportation routes is significant. In South Korea, this would be the Jayu Motorway; in China, investors may consider that water bound routes overlooking the Yalu River could be viable for China-North Korea traffic.
We’ve noticed that real estate prices in Dandong, a Chinese city bordering North Korea, has increased by more than 50 per cent in the last two months.
Will Singaporean Companies Benefit?
Another set of beneficiaries may be Singapore-based companies.
As of June 2018, North Korea’s Chairman Kim has only ever met four foreign leaders in person. This would be Presidents Moon, Trump and Xi Jinping, as well as Singapore’s Prime Minister Lee.
By many accounts, Chairman Kim had a positive experience in the Lion City, and productive interactions with Singapore government representatives.
It is too early to speculate how this nascent relationship may result in concrete economic benefits, such as free trade agreements or awarding of infrastructural contracts.
One attraction that Singapore possesses in dealing with the North is a lack of historical baggage. There are no pressing bilateral issues from the past century which might colour interactions or sentiment on the ground. Any relationship can be strictly business; there may yet be attraction in this for both parties.
The Long View
Any peace process is likely to take significant time to conclude.
A positive resolution would have direct benefits for 77 million North and South Koreans, and also enhance general security and prosperity for everyone in the region.
It is our hope that these welfare benefits, although less specific and investible, do outweigh the financial ones.