The stakes just got raised for South Korea in an ever-spiraling conflict in the Asia-Pacific theater. According to a CBS News report, a North Korean official declared that the isolated nation will respond with “nuclear war” if attacked by “U.S. imperialists.”
While the threat of all-out warfare is omnipresent, South Korean stocks typically evade any volatility due to the concept of mutually assured destruction. This time around, however, several major South Korean stocks have experienced volatility.
What makes the current salvo of North Korean threats unique is President Trump. He never backs down from any fight no matter how trivial, as evidenced by his tweets. Certainly, he’s not going to take any trash from Kim Jong Un, North Korea’s leader.
The other worry is inevitability. Recent missile tests from its belligerent neighbor have landed in Japanese territorial waters. So it’s not a matter of if North Korea can attack American allies, but when. The international community has condemned its nuclear weapons program in the strongest terms possible for decades. Today, North Korea has multiple nukes, while South Korea has no equitable deterrent.
The current condemnations — again, in the strongest terms possible — are against Kim Jong Un’s pursuit of ICBM capabilities. North Korea never listened back then, and is unlikely to do so now. In other words, we must deal with a nuclear-armed terrorist state without long-range capabilities, or with them. South Korean stocks are absorbing this reality, and responding in kind.
As a master negotiator, President Trump sees the writing on the wall. His approach is indelicate, but it’s not inappropriate. Unfortunately for South Korea and its now-pressured economy, the deal isn’t the most favorable.
South Korean Stocks to Sell: Korea Electric Power Corporation (KEP)
But because Korea Electric is so important to the nation’s infrastructure, it’s also a logical target for North Korea. Should tensions turn hot, KEP is substantially at risk. Any war-related disruptions would be a direct negative impact on the utility company’s bottom line. Even if nothing happens, investors are wary of taking on “outside risk.” Figuring out which stocks to buy is hard enough without the threat of nuclear warfare.
Korea Electric’s poor financials are also not helping matters. InvestorPlace ranks KEP stock as an “F,” citing terrible profitability metrics and negative cash flow. Thus, it’s not a surprise that shares have languished under Kim Jong Un’s threats. Since peaking this year on March 23, KEP is down more than 9%.
Although it’s one of the more well-known South Korean stocks, that status has worked against Korea Electric Power.
South Korean Stocks to Sell: KT Corp (KT)
Specifically, put up a string of positive earnings to offset negative profitability from the final quarter of 2015. All in all, KT stock was on the right path until the perennial pest to South Korea started barking.
Since March 23, KT has shed about 5% in the markets. Two weeks ago, the telecom giant suffered a gap down session as tensions spiraled out of control. Technically, the volatility has placed KT in a precious position. Following the gap down, shares are merely treading water in a horizontal consolidation. It’s also below its 50-day moving average, a metric that the markets will watch closely considering the geopolitical tensions.
Even if war doesn’t break out, the current environment is unfavorable for Korean stocks. A little more than a month ago, South Korean President Park Geun-hye was impeached on corruption charges. Ironically, she was criticized for her tough stance on North Korea.
Now, an even tougher sheriff is in town, which is sending a chill to KT and other South Korean stocks.
South Korean Stocks to Sell: Posco (ADR) (PKX)
So Posco must be immune to Kim Jong Un’s antics, right? Wrong! In the month so far, PKX stock is down 7%. Against its high of the year on March 20, the steel producer has dropped 11.5%. Presently, shares are sandwiched between its 50-day moving average at the top, and its 200-day MA below. Due to the sharp losses that it has incurred this month, the markets will look for a solid rebound. If that doesn’t occur, PKX will suffer even more pain.
The obvious risk is that Posco is integral to the manufacturing base of South Korea. Thus, the North will attempt to blow it off the map. Less macabre, but still considerably damaging, is the fact that investors have other options. PKX is a good stock, not a great one. Certainly, it’s not great enough to justify the heated and potentially deadly drama afflicting South Korea.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.