Despite Unpredictable Moves by North Korea... Attention on Inter-Korean Cooperation Stocks Highlighting Reconciliation Potential

On the 28th, North Korea's unidentified projectile launch caused an early dip... but South-North economic cooperation stocks rebounded
Investors chasing returns amid sideways market... cautious approach needed

[Image source=Yonhap News]

Despite North Korea's unpredictable actions, South-North cooperation stocks are placing more weight on reconciliation between the two Koreas. Experts pointed out that a cautious approach is necessary given the uncertain nature of these stocks.

On the 28th, Shinwon opened the market at 3,205 won, down 3.75% (125 won) from the previous day. Shinwon is a representative South-North cooperation stock, having operated the largest factory in the Kaesong Industrial Complex. Other South-North cooperation stocks also opened lower: Hyundai Elevator (Hyundai Elevator), the largest by market capitalization, fell 1.39%, Ananti, involved in the Kumgangsan resort project, dropped 3.10%, and Daewoo TIA, related to the inter-Korean railway, declined 2.63%. However, as of 3:17 p.m. that day, Shinwon rebounded to 3,390 won, up 1.8% from the previous day; Hyundai Elevator was down 0.89% at 49,850 won; Ananti rose 5.43% to 13,600 won; and Daewoo TIA remained unchanged at 6,850 won.

South-North cooperation stocks faltered early in the session due to North Korea's sudden hostile actions. According to the Joint Chiefs of Staff on the 28th, North Korea launched an unidentified projectile into the East Sea. This marks at least the sixth missile or projectile launch since September began. On the 27th (local time), Kim Song, North Korea's ambassador to the United Nations, further heightened tensions by urging the U.S. to abandon its hostile policy toward North Korea during his speech at the 76th UN General Assembly general debate.

However, investors appear to be focusing more on the possibility of reconciliation between the two Koreas. On the 24th, Kim Yo-jong, deputy director of the Central Committee of the Workers' Party of Korea, responded to President Moon Jae-in's UN speech by describing a declaration to end the war as an interesting proposal. Following this, South-North cooperation stocks such as Shinwon and Ananti surged by 29.93% and 14.49%, respectively.

In particular, the mention of an inter-Korean summit stood out as a difference from North Korea's previous actions. On the 25th, Kim Yo-jong stated in a communiqu? that “issues related to improving relations, such as the reestablishment of the inter-Korean joint liaison office and inter-Korean summit meetings, can be resolved quickly through constructive discussions.” Although exchanges of letters between the leaders and the reestablishment of the joint liaison office have been mentioned before, the significance of an inter-Korean summit is different. When the inter-Korean summit was held in April 2018, Hyundai Engineering & Construction preferred shares surged 178%, and Shinwon preferred shares rose 68.42% within a month, showing that such summits have historically acted as major positive catalysts.

However, concerns about North Korea's erratic behavior continue to warrant caution in investment. In this communiqu?, Kim Yo-jong conditioned dialogue on the cessation of military activities by the U.S. and South Korea, which could lead to more hostile actions. On the 10th of last month, North Korea abruptly cut off the inter-Korean direct communication line without prior notice. Upon hearing this news, Ananti and Shinwon plunged 6.47% and 3.94%, respectively.

Especially recently, as the domestic stock market has been stagnant, investors have increasingly flocked to South-North cooperation stocks, causing sharp rises. Since the KOSPI index has remained around the 3,100 level this month, investors hungry for returns have poured into these stocks. In fact, individual investors who had net purchased about 700 million won of Shinwon shares from September 1 to 23 increased their net purchases to approximately 5.4 billion won during the period from the 24th to the 27th, when hopes for inter-Korean reconciliation were high.

Hwang Se-woon, a research fellow at the Korea Capital Market Institute, explained, “It takes a long time to achieve meaningful results such as the Kaesong Industrial Complex, and even then, the situation remains uncertain,” adding, “A more conservative approach to South-North cooperation stocks is necessary.”