South Korea's largest pension fund and money managers took the death of North Korean leader Kim Jong Il in stride last week, despite a one-day plunge in Asia-Pacific markets when Mr. Kim's death was announced Dec. 19.
The announcement of Mr. Kim's death at age 69 that day triggered South Korea's benchmark Kospi stock index to close down 3.4% while the won dropped 1.6% against the dollar. Elsewhere in Asia, Japan's Nikkei 225 index retreated 1.3% and Hong Kong's Hang Seng fell 1.2%.
Markets recovered by the end of the trading week, with the Kospi closing at 1,867.22, surpassing the level at which it was trading before the North Korean leader's death was announced.
“We expect the situation to be stable,” said Scott Kalb, chief investment officer of the $37 billion Korea Investment Corp., Seoul, South Korea's sovereign wealth fund. “For the time being, investors remain much more focused on the European sovereign debt crisis, political problems and deleveraging in the U.S., a slowdown in the economy in China and other pressing global economic matters.”
Some investors saw the drop in South Korea's equities market as an opportunity. South Korea's National Pension Service, Seoul, bought stocks on Dec. 19 as the Kospi index fell.
The 345 trillion won ($296 billion) pension fund doesn't see further steep declines in equities, Kim Hee Seok, head of the fund's investment-strategy division, said by telephone Dec. 20.
“We'll have to monitor developments closely in terms of the successor and relations with South Korea,” said Stephen Docherty, head of global equities at Aberdeen Asset Management in Edinburgh, but “the greater concern for investors is the debt problems of developed markets.”
Mr. Kalb is also concerned about “the potential for instability in the North, and this could have some impact on regional financial markets,” he said in an e-mail. “We have been in close contact with the government and have been revising and updating our contingency plans.”
The political risks to South Korea are limited “as both sides of the Korean peninsula have prepared for this scenario for several years,” Hyung Jin Lee, investment director of Asia-Pacific equities at Baring Asset Management, said in an e-mail.
In September 2010, Mr. Kim announced that he would be succeeded by his third son, Kim Jong Un. Uncertainty over the new leader's ability to muster political support both within North Korea and elsewhere in the region has destabilized markets, Mr. Hyung said.
“The key thing to look for will be evidence that the ruling elite are backing Kim Jong Un,” according to Mr. Hyung, who is based Hong Kong. “Externally, we will be looking for signs of support from China, North Korea's most important political partner.”
However, Mr. Hyung added, “the economic links between North and South Korea are very limited with little prospect of contagion from any possible regime change in North Korea.”
Emerging markets have generally underperformed so far this year, largely related to investors' aversion to risk amid the eurozone sovereign debt crisis, sources said. The MSCI Emerging Markets index has fallen about 20% so far this year compared with a roughly 8% decline in the MSCI World index, which comprises developed markets.
“While important and significant in and of itself, (Mr. Kim's death) is unlikely to cause any major shake-up of the economies of Asia,” said Judith Saryan, vice president and portfolio manager at Eaton Vance Investment Managers, Boston.
Mark Mobius, executive chairman of Franklin Templeton Investments' emerging markets group in Singapore, wrote on his blog on Dec. 22: “We suspect this regime change is unlikely to create any immediate substantive impact on other North Asian financial markets for the moment. ... On a more optimistic note, we expect the new leaders may be willing to adopt Chinese-style economic reforms. “We feel the fundamentals for South Korea remain strong generally and the country has continued to show resilient growth on a longer-term basis.”
KB Asset Management, a unit of South Korea's second-largest financial services group, is buying futures on the nation's bonds, betting losses after Mr. Kim's death won't last.
Stocks may become attractive if they fall further on geopolitical risk, according to Franklin Templeton Investment Trust Management in Seoul.
Bloomberg News contributed to this story.