North Korea problem is just nothing new...

For anyone following the South Korean market, the North Korea problem is just nothing new. Tensions have been flaring -- and ebbing -- for years, so much so that people have become numb to them.

Though not a native, Robert Mann knows this all too well. He’s watched the South Korean market for 10 years -- and learnt his share of lessons when trading around news about the North. Mann and his colleagues on the Asian equity team oversee $5 billion for Nikko Asset Management Co., the $211.6 billion Japanese investment giant.

But even for Mann, the series of rapprochements recently under North Korean leader Kim Jong Un shouldn’t be dismissed so lightly.

“I’ve jumped too often in the past when things changed,” Mann, a senior portfolio manager, said in a phone interview from Singapore. But this time is different, and the market isn’t pricing in the positive developments, he said.

After test-firing more than a dozenmissiles and conducting a nuclear test last year, North Korea’s Kim surprised everyone by agreeing to send athletes south to participate in the PyeongChang 2018 Olympic Winter Games in February, where the two Koreas fielded a joint women’s ice-hockey team. Then the countries held a summit in April, where they vowed to have peace on the peninsula. Now, U.S. President Donald Trump is set to meet Kim for the first time in June.

“It’s been building bit by bit from the Olympics onwards,” Mann said. "Just a series of steps, all in the right direction."

To Mann, South Korea’s benchmark Kospi index hasn’t factored in the positive implications. The stock gauge is little changed since the inter-Korean summit on April 27. And it’s still one of the cheapest markets in Asia, trading at just slightly more than book value.

Still Cheap

“Is the market pricing in lots of good news?” Mann said. “If that was the case you’d see very high valuations in Korea overall, which you aren’t.”

Mann says positive developments on North Korea could have a knock-on effect on reform of the so-called chaebols, or family-run conglomerates, whose corporate governance is often cited as the other big reason for the Korea discount.

Moon Jae-in’s “popularity has gone up a lot,” Mann says of the South’s president. “If he can use that power to really push some of those changes through, that’s also very positive.”

But whether or not that happens, the developments with the North are something significant, Mann says.

“When people talk about risk in markets they almost always refer to things that can go wrong,” Mann said. “But things can also go right.”