New dictator, new businesses?

North Korea-related stocks continue rally amid overall market volatility

Stock prices of companies that conduct business in North Korea are rallying amid growing signs that the Stalinist nation is embracing economic reform and anticipation that the severed economic relationship between the two Koreas will be revived.

The share prices of firms with factories in the industrial complex in the North’s border city of Gaeseong have fluctuated dramatically in recent months.

Underwear manufacturer Good People saw its share price jump to 2,040 won on Friday from 1,420 won at the end of June while watchmaker Romanson saw its shares soar to 6,510 won from 5,500 won in the same period. Shares in fashion brand Shinwon, also increased to 1,365 won from 1,145 won.

The increases came as the reclusive state’s leader, Kim Jong-un, repeatedly hinted at his desire for changes to the country’s economy.

Since he took power after his father’s death in December, he has made public appearances to emphasize that he cares about people in North Korea who live in poverty. He has also recently disclosed that he is married and appeared with his wife for the first time at a ceremony last month.

Kim also instructed broadcasters to air a performance by the Moranbong Troupe last month, which included Mickey Mouse and featured the theme song from the “Rocky” movies, icons of America’s capitalist culture.

It is obvious that he is different from his father who put more emphasis on the importance of the military even during economic hardships. This change has also fuelled speculation that the new leader will soon come up with economic reform plans and introduce some market economy elements.

The National Intelligence Service (NIS) also reported last month that North Korea has a task force tackling changes to the country’s economy on the orders of the new leader.

Shares of companies engaging in an array of inter-Korean economic cooperation projects also shot up last week, following news that Kim has begun official diplomatic affairs by meeting Wang Jiarui, head of the International Liaison Department of China’s Communist Party on Aug. 2.

Upon this news, the stock value of Emerson Pacific Group, which operates golf courses in the North, hit a daily high to end at 3,915 won on Friday.

Also, shares of Ewha Technologies Information, which sends electricity to the North, also increased sharply by 5.24 percent to close at 1,045 won. The firm has seen its stock price, which dropped below 500 won last year, jump drastically over the past few months.

Shares of Kwangmyung Electric, which traded at around 2,000 won in December, have also increased in the past few months to close at 3,035 won on Friday.

Obviously, reform of the North Korean economy is expected to have a positive impact on the South’s economy, as the suspension of various economic cooperation projects has caused huge financial losses.

According to Hyundai Research Institute, direct financial damage from the severed relationship between the two Koreas since March 2008 is estimated at $4.99 billion.

The institute also said the downsizing of business at the Gaeseong complex caused $2.32 billion in deficits and the suspension of trade and tours to Mt. Geumgang further resulted in losses of about $2 billion.

But experts said that investors should be cautious about purchasing stock related to North Korea because share prices can fall if the rosy anticipation of economic reform proves to be wrong.

“We should adopt a careful stance although there are high expectations that the North appears inclined toward economic reform although we still lack evidence of that,” Park Hyung-joong, researcher at the Korea Institute for National Unification said.

Many experts also doubt that the relationship between the two Koreas will improve drastically anytime soon.

They say “theme” stocks related to North Korea will not continue to rise without improved earnings of each company.

“It is advised that investors should check various risk factors before purchasing shares related to the North because it is basically an investment based on anticipation,” said Lee Joo-sun, an analyst at KDB Daewoo Securities. <The Korea Times/Kim Tae-jong>

news@theasian.asia