The Peace Process Isn’t Helping Asian Stocks

Recently, South Korea’s president met with the leader of North Korea.

Next month, the U.S. president will meet the North Korean leader. If successful, these talks could culminate in a Nobel Peace Prize.

Peace talks in Korea are moving at the fastest pace since 1953. Within weeks, it’s possible a treaty could end the Korean War that began in 1950. This seems like it should be the kind of news that boosts stock prices.

South Korean Stocks

But the chart below shows South Korean stocks aren’t reacting to the news. Since January, prices in South Korea mirror the decline and recent action of U.S. stocks.

South Korean Stocks

The KOSPI is a benchmark index of South Korean stocks. It’s similar to the S&P 500 Index in the United States. The KOSPI has been closely tracking the S&P 500 for some time.

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The KOSPI seems to be ignoring the news. This could mean traders see little chance of a breakthrough in the meetings.

It’s possible the leaders of the three nations could agree on a peace plan. That could even put North Korea on the path toward reforming its markets. But that path is likely to be similar to China’s moves toward free markets that began in the 1990s.

Over the years, China has maintained many of the features of totalitarianism while embracing a few aspects of free markets. North Korea, whose leader has visited China twice in recent weeks, could plan a similar approach.

This would have a long-term effect on markets. We could see North Korean factories offer cheap labor to the world, as the Chinese factories did in the 1990s.

Cheaper products would actually hurt many Asian countries, which could explain why stocks are not pricing in a peace dividend.

If cheap labor replaces output in other countries, there might not be any economic growth associated with North Korea’s transition to the global economy.

Peace is, of course, still an important goal. But for investors, there are no clear winners in the process for now.

Regards,


Michael Carr, CMT

Editor, Peak Velocity Trader

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