It’s probably not a nuclear warhead inside an intercontinental ballistic missile (ICBM), nor World War 3 that you have to worry about. Although both are frighteningly possible, as you’ll discover below. Even though war in Korea is far more likely than anyone realises, it’s the financial impact that you need to be aware of.
I don’t care if that sounds callous. The war could devastate millions of lives. Including Koreans and Japanese I know well. But it’s my job to make you understand the risks and opportunities a war would pose to you and your wealth.
I’ve also added a few stock picks for you down below. You can see them by clicking here.
But first, let’s try to understand the broader situation.
How to protect your wealth from the return of the Korean War
Did you know the United Nations is still at war with North Korea? That’s despite North Korea being a member! The reason is that the war ended with an armistice, not a declaration of peace.
Most people couldn’t even find Korea on a map. Even if you can, you probably don’t know Korea shares a small but busy land border with Russia. And China’s planned “Silk Road” flows through this border with rail and road links, as well as a planned new port nearby.
The value of North Korea’s rare earth metals is estimated at US$6 trillion, and South Korea’s manufacturing companies happen to be a major user. But the North Korean resources remain untouched, giving China a stranglehold on the market.
It’s odd facts like these that make the hermit kingdom so fascinating. But the intrigues are beginning to become relevant to your life, not just entertainment.
North Korea is a buffer state for China and Russia, protecting them from the American military build-up in South Korea. Without that buffer state, tensions would be far higher. The Russian meddling in eastern Europe illustrated how.
North Korea is also the threat that is pushing Japan to rearm. The constitution will need to be changed to allow this, putting an end to Japan’s peaceful intentions. An armed Japan is a terribly destabilising force for the region. Asian nations have long memories and Japanese aggression in the distant past makes relations very tense.
The latest election in Japan seems to have given Prime Minister Shinzō Abe the go-ahead to rearm. Much like me on the beach, Prime Minister Abe recently fell into a sand bunker while playing golf with Donald Trump. Perhaps his ideas about North Korea are just as misguided.
You can also think of North Korea as one of a selection of rogue states that spit in the face of American hegemony. Put together, Syria, Iran, several African nations, Venezuela, Cuba and many others do play an important role in international affairs.
But right now, North Korea certainly is stealing the show. And the reason why is simple.
Why war is the most likely outcome in Korea
Predictions about geopolitics come down to probabilities, not certainties. A war in Korea is far more likely than people realise. Importantly, far more likely than financial markets realise. But why?
Take a look at the incentives the various leaders face. Kim Jong-un is looking at his fellow despotic leaders around the world and reaches one obvious conclusion. Having nuclear weapons is crucial if he wants to survive.
Libya and Iraq gave up their nuclear weapons programmes, or cooperated with the US on them. Their despotic leaders are now gone. Iran has pursued its weapons programmes in defiance of the US for many years. And in Syria, the leader supposedly used chemical weapons, despite a threat from President Barack Obama should he do so.
The lesson is that defiance pays, cooperation does not.
Those threatened by North Korea are in a bind. Kim is like a hostage taker who grows stronger over time as more and more nations fall within range. As his range grows, so does his ability to make demands.
Faced with a hostage taker who grows stronger instead of weaker over time, the incentives to act are reversed. The earlier you make your move, the less risks.
The combination of Kim’s desire to survive and the US’s need to prevent a nuclear-armed Kim explains why war is the most likely outcome. Of course, there’s always Trump’s unpredictable ways.
The chain reaction leading to World War 3
The problem with declaring war is that it’ll be immensely expensive. Not just financially. The level of destruction North Korea is capable of is an unknown.
Despite an American victory being near certain, North Korea could most likely destroy a big chunk of South Korea’s capital city Seoul with artillery alone. Any ICBMs that are actually functional could strike Japanese cities too.
But the war needn’t end there. This is where the importance of the chess game befuddles the whole issue. The last Korean war ended as a stalemate thanks to Chinese intervention. It supported North Korea, and the US chose not to escalate into a war with China.
This means China would have to sanction a Korean war for it to be worth fighting. Otherwise the conflict could either escalate out of control or leave the US backing down once more.
Thanks to Russia’s propensity to meddle, and the opportunity to do so, it’s likely the Russians will have to sanction a war too. Otherwise Russia’s support for North Korea could create another risk of escalation.
The likely outcome is that Russia and China accept North Korea must be dealt with. But they’ll demand a high price from the West. Perhaps China’s plans in the South China Sea will expand. Perhaps Russia’s meddling in eastern Europe will have to go unchecked.
It’s ironic how the pawn of North Korea is really the most important piece of the chess game in Asia.
Now let’s turn to how you can profit and protect yourself from the coming war.
South Korea’s bitcoin boom
With China, Japan and South Korea dominating bitcoin markets, and the strong link between bitcoin and geopolitics, this article can’t go without discussing the cryptocurrency.
Thanks to capital controls in China, most bitcoin transactions take place there. The Chinese use bitcoin to move money internationally. Each time their government cracks down, it triggers a surge in bitcoin as more Chinese resort to the cryptocurrency.
In Zimbabwe, political, economic and monetary chaos has created an odd mispricing in the bitcoin market. At one point, bitcoin in Zimbabwe was 80% more expensive than in the US, despite people using the US dollar there. The reason is that bitcoin exchanges require all sorts of details to register, and they can only serve local customers. The bitcoin market is still geographically segmented. But the real lesson here is that we can confirm a crisis does make bitcoin demand surge, and fast. The price differential in Zimbabwe is proof.
In Venezuela, bitcoin is about to become a national security issue. Thousands of people are withdrawing their life savings from traditional banks, trying to protect it from the hands of the government. Also, due to the a heavily subsidised electricity, mining bitcoin and litecoin is becoming popular as a way of generating a minimum income as their price keep to rise.
Most importantly for us here, we’ve already seen a link between bitcoin prices and North Korea’s missiles.
When tensions rise, so do bitcoin prices
So, on the one hand, war in Korea could make bitcoin soar. Huge numbers of South Koreans and Japanese might buy to safeguard their wealth from war and get it out of the financial system. Chinese and Russian buyers might pile in too if their governments are ambiguous about the risk of entering the conflict. Bitcoin is a great way to bet on war in Korea.
But it’s not so clear cut. If the damage to South Korea’s economy is severe or if an armed missile reaches Japan, then some of bitcoin’s biggest demand centres could be undermined. It’s likely that buying elsewhere would make up the shortfall, but you can’t be sure.
Bitcoin is a fantastic way to profit from the potential for war in Korea. But it’s not a sure bet. And the volatility in the cryptocurrency makes it a risky bet generally.
Perhaps gold is a better option. It predictably rises during wartimes. It can fall back to pre-war levels in the aftermath, but tends to benefit from the financial tensions created by the cost of war.
4 stocks to watch: Markets’ reaction to war in Korea
Owning Korean stocks right now is downright dangerous. In my opinion, that warning extends to Japanese and Southeast Asian shares too. These would be hardest hit at the outbreak of a conflict.
European stocks are least likely to be affected, while the American stockmarket could be bi-polar. Although the US would be Kim’s target of choice, it may not be reachable. (By the way, a North Korean ICBM would most likely go over the North Pole, so New York is within range of a decent ICBM.)
Companies to avoid, many of which trade on the London market in some form, include Samsung, Hyundai, and South Korean exchange-traded funds (ETFs).
Stocks that would benefit from war in Korea are primarily American arms manufacturers. Especially higher technology based ones. Thanks to President Trump’s comments about “fire and fury”, we know which stocks jump on US aggression. The following companies kicked off a bad lead from the rest of the stockmarket by surging on Trump’s aggressive comments:
- Northrop Grumman [NYSE: NOC] is a diversified defence and aerospace company with very strong ties to the US military.
- Lockheed Martin [NYSE: LMT] is more focused on aerospace technology, but still with the US military as the main customer.
- Raytheon [NYSE: RTN] manufactures the electronics and weapons defence systems need.
For a diversified approach to the American defence sector, the iShares US Aerospace & Defense ETF [BATS: ITA] is the best bet.
But there’s a more interesting way to benefit.
The Korean reunification bonanza
The outcome of a war in Korea isn’t as simple as it might seem. The reunification of North and South Korea is far from a forgone conclusion. China and Russia aren’t likely to support having an American-dominated Korea on their doorsteps. And South Korea is unlikely to accept the North Korean way of doing things given the poverty it brings.
However, all this was true of Germany too. I think international observers strongly underestimate the desire to reunify Korea. Which creates a fascinating profit opportunity.
West Germany’s stockmarket tumbled alongside the Berlin Wall. Reunification was expected to weigh on the powerful West German economy for decades. And it has. But the crash was also a brilliant time to invest. The German stockmarket went on to outperform after the initial crash.
My prediction is that, if war breaks out and goes well, a reunification will happen. Or perhaps just a stronger economic partnership between the two Koreas which slowly converge.
If I’m right, major Korean companies will be on the receiving end of one of the biggest economic bonanzas in history. The infrastructure contracts to redevelop North Korea will make Korea Electric Power Corporation’s revenues soar. The availability of cheap North Korean labour could cut costs for major manufacturers like Hyundai. And the new market for consumer products could make Samsung shares surge.
More important than anything, South Korea’s immense electronics companies could find themselves with cheap rare earth metals, crushing costs. Electric cars, phones and computers from South Korea could dominate competitors.
So, although you should remain well away from South Korea’s stockmarket for now, waiting for a buying opportunity could prove incredibly profitable.
Until next time,
Capital & Conflict