When Kim Jong Un’s weeks-long disappearance from public view in April prompted speculation over the health of the North Korean leader, Moody’s analysts tapped government contacts in Seoul, across the border, hoping to cut through the market chatter.
The wild theories over the fate of Mr Kim — which were put to rest with his re-emergence at a fertiliser factory this month — were the latest reminder for investors and traders across Asia of the ructions that can be caused by the secretive rogue state.
After a spate of news reports suggested that the 36-year-old dictator might be gravely ill, a clutch of Seoul-listed stocks lost ground and the South Korean currency wobbled.
“We had to reach out and say ‘what is going on with this absence?’ Of course, they might not be at liberty to tell us what they really know, if indeed it is a state secret,” said Christian de Guzman, a Singapore-based analyst at Moody’s, the credit rating agency.
Intrigue over a possible transition of power in the nuclear-armed nation brought back memories of the turbulence of a few years ago, when a series of nuclear and missile tests coupled with bombastic rhetoric from Mr Kim and Donald Trump, the US president, ratcheted up tensions.
A new power struggle in Pyongyang “would have been pretty worrisome for a lot of investors here . . . it could mean a lot of unstable activities engaged in by whoever is taking over”, said Chan Lee, managing partner at Petra Capital Management, a Seoul-based fund.
In Mr Kim’s apparent absence, the playbook was clear. Stocks were sold if they were seen as potential beneficiaries of North Korea opening to foreign investment, such as Hyundai Elevator and resort operator Ananti. Simultaneously, local defence stocks — such as Hanwha Aerospace, Korea Aerospace Industries and Victek — soared.
Analysts and fund managers attributed the movements mostly to local retail traders tracking gyrations on the Korean peninsula, as well as shorter-term momentum traders, such as hedge funds, dipping in and out of markets across Asia.
During such events, contagion rarely spreads to big companies on the broader tech-heavy Kospi index in Seoul, but jitters are still felt by longer-term institutional investors with exposure to groups such as tech giants Samsung and LG, and carmaker Hyundai.
“When things do get really scary . . . there are people who want to pull out money [from South Korea] for a while,” said Mr Lee. The probability of military conflict was low, he added, but “if something happens the result will be catastrophic”.
Mr Kim’s high-profile disappearance was a reminder that for Asian strategists, determining what is credible when it comes to North Korea is hard enough for spies and diplomats, let alone for finance professionals.
Ratings analysts, who say the potential for a severe geopolitical event constrains South Korea’s sovereign credit rating, are left sifting through at-times-unreliable South Korean local media reports as well as satellite imagery published by US think-tanks.
Material from the Stimson Center’s 38 North programme and the Center for Strategic and International Studies’ Beyond Parallel site, among others, offer glimpses of on-the-ground shifts including missile developments and the movements of Mr Kim’s private trains.
“No one really knows what is going on,” said Mr de Guzman of Moody’s. “We do the best we can with imperfect information; that is the way it has always been. There has never been a time that we’ve had a fair degree of visibility into North Korea.”
He added: “This is the nature of the co-operation that we have with the [South Korean] government. Because we place an emphasis on geopolitical risk, they wouldn’t want us to downgrade based on what they regard as unsubstantiated information picked up from the news wires.”
Jeremy Zook, a Fitch analyst in Hong Kong, said that while the group’s sovereign and corporate ratings for South Korea were “essentially quantitative”, making judgments over the levels of risk related to North Korea could be “subjective”.
Mr Kim’s potential demise “could have gone either way”, he said. It could have “brought more volatility to the situation or perhaps somehow brought an easing of tensions . . . It would have elevated the uncertainty of the situation quite considerably”.
Moreover, that uncertainty has implications beyond the borders of South Korea. Provocations regularly prompt flights towards the Japanese yen as a haven, for example. And in the event of a serious escalation, other countries in the region will be affected. Vietnam was “particularly susceptible”, given the south-east Asian country’s strong supply-chain linkages with South Korea, noted Mr de Guzman.
“If Korea is engulfed in flames, then certain manufacturing processes in Vietnam just stop, because they won’t be able to get inputs,” he said.