Should investors be concerned by North Korea?

Emma Wall  |   25/09/2017 Text size  Decrease  Increase   |  

Emma Wall: Hello and welcome to the Morningstar series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Mark Williams, manager of the Liontrust Asia Income Fund.

Hello, Mark.

Mark Williams: Hello.

Wall: So quite a lot going on in your geographical region at the moment. There are some political rumblings from Korea that have caused a bit more volatility in the Asian markets. As someone who invests in these countries how concerned are you by that macro threat?

Williams: Well it's something that we pay a lot of attention to and the problem with it is that it's very hard to actually work out exactly what is going to happen. So, what we do, is we look at the effective or the expected results if there was a war. And it seems very clear that if Kim Jong Un did push things to going to war, then effectively it would be suicide. He would lose.

But in the meantime, it would clearly be horrendous. They have got over a million troops in North Korea. They have got hundreds of thousands of artillery, Seoul is only 25 miles away from the border. So, the human loss would be terrible as also would the economic impact. There is no way of quantifying that, given that we don’t know whether he would push things to a nuclear war which would obviously be the worst outcome.

But when someone if they go that far is likely effectively to end their regime, whereas what seems most likely is that they want regime stability at the end of this. We have to think that its unlikely to be allowed to go that far. And so we look at it as a potential for opportunity for investment. Markets have held up remarkably well. And I think that's probably why the people in South Korea have been used to this for a long time.

So, not with the nuclear element, but beyond that missiles have been thrown into the sea for a number of decades now. And I think they carry on their daily lives expecting at some point there to be some bringing back to the table and reconciliation.

And markets have come down 7 per cent in US dollar terms, the Korean market or 5 per cent in local currency terms. And if they came further there are a number of companies, one which we bought recently called LG Chemical which is very near it's highs at the moment and we'd be happy to add more to that.

Wall: And what about farther afield, because of course these missiles are flying over Japan, but Asia is all connected. Is this something that we can see the ramifications, at least the volatility in the opportunity set going across the region.

Williams: Yes, very much so. I think the volatility would be slightly less in other countries, but again if it went to war, there is a high chance that Japan would be dragged in. There would be enormous disruption to supply chains for China, that would obviously be a huge impact.

A large number of their re-exports will be at least have some components coming from Korea. Globally if you look at LCDs, liquid crystal displays, 40 per cent of those come from Korea, a large amount of mobile phone components come from South Korea. All of this would be impacted.

But again, you have to, it's a binary outcome either there will be a war or not. And we would have to think that there won't be. But at the same time acknowledging that there are two relatively inexperienced leaders, Donald Trump obviously on the one hand and Kim Jong Un on the other, and it's going to be policy error which would drive it to that. Which is why maybe already if you look at valuations particularly in South Korea, obviously they are relatively cheap at the moment.

Wall: Putting that to one side. You've mentioned Donald Trump, there were concerns before he came into power that it would be bad news for China. He's actually stepped back from threats he made during the campaign trail about China. What is the outlook for the sort of the broader Asia region with that background in mind?

Williams: Again, we see him more likely as a source of volatility rather than a very significant impact. If you look at what he was saying earlier, I mean in the run up to the election. He was very much anti-China and he was looking to do something to increase trade tariffs to stop the current account deficit from continuing to grow. And even last week he mentioned something similar about South Korea and the free trade agreement there and whether he was going to step back from that.

But again, if you look from the US point of view from the impact on the Donald Trump would have to be negative. And General Motors say they sell more cars, if you look including their joint venture in China to China, than they do to the US. So, it would upset them. Boeing a third of all their 737s in their order book are destined for China it would upset them. I don't think many jobs would actually come back to the US if trade tariffs were put on. Because there are other alternative low-end manufacturers or cheap manufacturing bases to take over.

So, I don't think it would benefit the consumer or the voters at that level in terms of employment and equally it would give a positive impact or a push up for inflation as the cost of all the imports and again a lot of the electronics components fed through. So, it doesn't seem that he wins by doing that so yes, I would expect that he will come out with a number of announcements, but as those go along, he seems to realize at every stage that it's not really going to benefit him. And there is one thing I think he might actually achieve and I think he's got a fair point with and that’s maybe opening up some access to the Chinese market for American companies.

And that's one thing where I think he has got a fair point. The Chinese were the big winners of the WTO agreement and I think if they give some concessions and allow some international companies, which they have done, but only to a very marginal degree to come into their markets. Then I think that would be a positive step forward for the US and a very fair one.

Wall: Thank you very much, Mark.

Williams: Thank you very much.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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