By JANE KOTCHKINA 26/11/2010
On 23rd November 2010 North Korea opened fire at the South Korean island of Yeonpyeong near a disputed border in the Yellow Sea. Four people were killed and 20 wounded, including some civilians. South Korea returned fire and scrambled fighter jets in response. The South Korean defence minister Kim Tae-young resigned over claims that country was unprepared for the attack.
A possible reason behind the attack is a show of force as North Korean leader Kim Jong-il prepares to cede power to his son Kim Jong-un. This followed a demonstration of nuclear facilities to a visiting US scientist earlier this month. It is unlikely that North Korea is looking to escalate the conflict between countries at this time.
China called for North and South Korea to maintain peace and to resume talks towards nuclear disarmament of the Korean Peninsula. US President Barack Obama, Japanese Prime Minister Naoto Kan and South Korean President lee Myung Bak all called for China to use its influence to control North Korea’s behaviour.
China is North Korea’s only ally and its largest trading partner and our view is that it will try to get to grips with North Korea, to avoid tensions with the US.
As relations heat up in the Korean peninsula investors may be concerned over the impact on South Korea and the surrounding region. At the end of October 2010, South Korea accounts for 14% of the MSCI Asia Pacific ex Japan index and for 13.4% of the MSCI Emerging Markets index. For tracking funds that is a significant exposure.
The recommended Aberdeen Asia Pacific and Aberdeen Emerging Markets are underweight South Korea with 5.9% and 5.3% invested in the country respectively. The managers have struggled to find companies that satisfy Aberdeen’s quality criteria. These positions are not related to tensions with North Korea and managers are not looking to change the exposure on the basis of recent events.
First State Asia Pacific Leaders fund has 14% invested in South Korea in line with the index, while First State Global Emerging Markets Leaders fund is underweight with 12.05% invested in the region. Current South Korean weighting in the funds is driven by stock selection. The fund managers believe that this time the conflict is not likely to escalate and are not looking to change their allocation to the country.