Bloomberg News

Templeton’s Mobius Sees Smooth North Korea Leadership Transition

January 04, 2012

(See EXT2 <GO> for more stories on North Korea and Kim Jong Il’s death.)

Dec. 23 (Bloomberg) -- North Korea’s leadership transition will probably be smooth and its new rulers may be willing to embrace economic reforms similar to those in China, said Franklin Templeton Investments’ Mark Mobius.

A regime change in the communist nation is unlikely to have “immediate substantive impact” on other North Asian financial markets, Mobius, executive chairman of Templeton Emerging Markets Group, wrote in his blog. The company is still holding on to South Korean equities, he said in an interview with Bloomberg Television today.

South Korea’s Kospi slumped 3.4 percent on Dec. 19, the most in five weeks, after the death of North Korean leader Kim Jong Il sparked concerns over succession in the totalitarian nation. The gauge has risen 5.2 percent since then. The focus now is on his son Kim Jong Un, who is thought to be in his late 20s and was named to senior military and party posts last year.

“In some ways, the break from the past could be a good signal so I’m more optimistic than pessimistic,” Mobius said in the TV interview. “I think the transition is going to be rather smooth.” Franklin Templeton maintained its holdings of South Korean equities this week, he said.

North Korea’s state media called for citizens to “loyally follow” Kim Jong Un, according to a Dec. 19 statement. The country will become more open under the new leader, compared with the rule of his late father, according to almost half of South Koreans who responded to an opinion poll.

China Ties

“In this kind of environment, we can expect some change,” Mobius said on TV. “I don’t think it necessarily means some military change but some economic change.”

Close ties with China, a source of oil and food and a purchaser of coal, have yet to convince North Korea to mirror its larger neighbor’s liberalization. North Korea’s trade of $4.17 billion in 2010 compared with South Korea’s $891.6 billion, the Bank of Korea estimates. Gross domestic product of 30 trillion won in 2010 was one-fortieth of the size of South Korea’s, according to estimates by the South’s central bank.

Officials from South Korea and China may discuss North Korean issues next week in Seoul, Yonhap News reported today.

“We expect the new leaders may be willing to adopt Chinese-style economic reforms, which could result in a much more relaxed political environment,” Mobius wrote in his blog.

Lower Valuations

China’s economy has grown an average of 10 percent a year and overtaken Japan’s as the world’s second-biggest since then- leader Deng Xiaoping began rolling out free-market policies in 1978.

The Kospi gained 1.2 percent as of 1:20 p.m. Seoul time today. The gauge’s rally since Dec. 19 came as the government pledged to take action to soothe markets and foreign investors overlooked the potential for political upheaval and bought equities in Asia’s cheapest major stock market.

The Kospi trades at 8.9 times estimates for next year’s earnings, the lowest in Asia after Pakistan and Vietnam, according to data compiled by Bloomberg.

Overseas investors purchased a net 329.9 billion won ($287 million) of shares in Kospi companies on Dec. 21, the most in three weeks, after selling a net 564.9 billion won during the previous two days, according to data from Korea Exchange Inc.

“There has always been a threat of invasion from the north, and this threat has been amplified by the various actions taken by the North Koreans over the years,” Mobius wrote in his blog. “Therefore, some foreign investors have become inured to the situation.”

The Kospi fell 0.8 percent on July 11, 1994, the first trading day after North Korea announced the death of Kim Il Sung, Kim Jong Il’s father. The gauge advanced 18 percent in the next four months.

--Editors: Darren Boey, Brett Miller

To contact the reporter on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net;

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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