Goldman Sachs says Korea impact on markets could be short-lived  

November 24, 2010

GS report yesterday says it believes the impact on the financial markets from the Korean fracas could be short-lived, barring any further escalation of tensions

In a report to its clients yesterday, Goldman Sachs Global Economics, Commodities and Strategy Research said that “Given previous incidents of North Korean provocation, we believe the impact on the financial markets could be short-lived barring any further escalation of tensions. The KRW fell sharply at the time of the first nuclear test but fully recovered in 13 days while impact on KOSPI has never lasted more than 5 days.”

GS hosted an investor conference call with Doctor Lee, Ambassador for International Security Affairs in the Lee Myung-bak Administration and Dean of the Graduate School of International Studies at Yonsei University. In the call, the expert said that there could be three reasons for the provocation:

1.This could be a tactic to put pressure on the US and South Korea for renewing the Six-Party Talks and to get more economic concessions.

2.North Korea might have wanted to raise tensions in the Korean peninsula to consolidate domestic support for an emerging leadership—for the 27-year-old son of the current leader, who has recently been promoted to a general and ranked as the No 2 in the government.

3.North Korea might have sought to weaken the South Korean government and divide public opinion in South Korea, given the current South Korean government’s adherence to UN sanctions against North Korea.

The report cites a chart which shows that exports from North Korea to South Korea declined 20% in 2009 following sanctions related to the second nuclear test of North Korea.

The report also notes that it took just 5 days for the KOPSI to recover from the negative impact of N Korea’s first nuclear test in October 2006 and just one day to recover from the loss after the sinking of its naval ship in the Yellow Sea.

GS characterises the incident as serious since this is the first direct artillery attack by North Korea on South Korean soil since the Korean War. “The provocation is unprecedented and we believe could develop further, given the political uncertainties in North Korea amid its power transition. The South Korean military is currently on its highest non-wartime alert.”

But there are some signs that things could be stabilising, says GS. For example, the Korean president has held an emergency meeting and asked the South Korean army to prevent further escalation while calling for a ‘controlled yet resolute’ response. China has expressed concerns about the North Korean shelling and asked for both parties to do more to contribute to peace and stability on the Korean peninsula — certainly a mild response.

GS gives a brief of what happened on 23rd November:

North Korean military bases fired some 100 shells at one of two South Korean islands closest to North Korea and located in a disputed area. Two South Korean marines were killed and 17 were injured. Several civilian houses were destroyed, two civilians were injured, and some civilians evacuated. The South Korean army fired back on the military bases in accordance with the rules of engagement. North Korean casualties are not known at the time of this writing. The island, Yeonpyong do, is only 12km away from North Korea and near an area where a naval ship-sinking incident took place earlier this year. The North Korean military claimed about 4 hours after the incident that they had fired in return for a military provocation from South Korea. The South Korean navy has been undertaking a military exercise in the area since 22nd November, which North Korea protested earlier in the day.

The Sensex was down 1.42% at the time of writing this report, while Asian markets ended mixed.  

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife). — Munira Dongre