North Korea engaged South Korea in an artillery duel near their borders on Tuesday, November 23, sparking off a fresh round of tensions on the Korean Peninsula. Regardless of the motivations behind North Korea’s latest transgression, this incident is more serious than its previous provocations because it was the first artillery attack on the South’s territory since the war in 1950 and because the attack included fatalities to South Korean civilians.
This incident will see deepening geo-political tensions between the North and South and is likely to be prolonged. However, the crisis is unlikely to escalate further as North Korea does not have the capability to implement and maintain a war without the support of its main ally, China. China is currently the primary supplier of fuel consumed in North Korea. The relationship between the pair has been difficult as China does not agree with North Korea’s provocative actions to date. Also, the South Korean government is trying to resolve the situation peacefully. In South Korea, there are some people who favor a soft line with the North. However, the recent event is probably going to weaken these views going forward thus enabling the South Korean government to take a much harder stance.
As for the impact on the stock market, past incidents that have resulted in stock market corrections were short-lived. Thus, we believe it should not be any different this time. However, on the currency front, the Korean Won (KRW) was weakened and the Credit Default Swap spread of South Korea expanded sharply. The Korea Composite Stock Price Index (KOSPI) fell by more than 2% at the opening on 24 November but since has recovered and ended the day relatively unchanged. Year-to-date, the market is up 17% in US$ terms. Assuming that the situation improves and does not escalate into a larger scale military confrontation, the financial market may stabilize quickly based on past experiences following the impact of North Korea’s actions. For instance, the Korean market recovered shortly after North Korea’s nuclear tests of 2006 and 2009.
By Claus Born, Senior Executive Director, Templeton Emerging Markets Group
At the end of November 2010, Chile, Colombia and Peru are planning to integrate their stock exchanges, providing local investors with more investment opportunities and also allowing companies to access a broader investor base. We are likely to see increased foreign investor participation with improved liquidity. Once fully integrated, this new regional exchange should have the highest number of issuers in Latin America (before Mexico and Brazil), the region’s second-largest market capitalization (after Brazil) and its third-largest trading volume (after Brazil and Mexico).
Year to date, equity markets in Chile, Colombia and Peru returned 38.8%, 60.2% and 52.6% respectively, outperforming the larger equity markets of Brazil and Mexico, which rose by 4.7% and 18.3% respectively.
Two major events brought the small Andean country worldwide media coverage this year. The most recent was the spectacular rescue of a group of miners trapped underground for more than two months. Chile’s newly elected President Sebastian Piñera was among the first to greet the miners when they came out of the ground. And earlier this year, a devastating earthquake with a magnitude of 8.8 struck the country, the seventh-strongest earthquake ever measured worldwide. While many were rescued from the rubble and the number of survivors was high, the total damage is estimated to reach about 15% of the country’s GDP.
By Mark Mobius, Executive Chairman, Templeton Emerging Markets Group
Argentina’s economy has been growing at a steady pace since the 2001-2002 economic crisis, typical of a recovery following a period of depression. The country has also benefited from a global environment that has allowed it to enjoy the best terms of trade in more than a century. Its level of recovery is made possible by its investments in infrastructure and the development of its agriculture sector in the 1990s, a period of strong capital inflows.
The country is now undergoing a political transition as the presidential elections will take place in October 2011. Following the recent passing of former President Nestor Kirchner, it is premature to say if Mrs. Cristina Kirchner’s administration will be able to cope with the death of her husband and mentor. Although Mrs. Kirchner had enjoyed good support in the polls and could well head her party’s ticket for the 2011 presidential elections, the government has, after all, suffered the loss of a key member articulating governmental policies. Mr. Kirchner’s departure is a significant, negative impact to the political spectrum that they represent and it increases the chances of other political ideologies taking power in the country in the coming elections. We think the current administration is unlikely to significantly change policies before next year’s elections, but political developments in Argentina can be very dynamic. With the high degree of uncertainty going forward, we will continue to watch developments closely.
While the external environment remains favorable, adjustments are needed to sustain Argentina’s economy in the long run. Actions that we believe are required include normalizing utility rates, liberalizing markets currently under government restrictions, or slowing the pace of growth of public spending to cool down a possibly overheated economy. It remains to be seen whether the current or new administration will make such bold but necessary moves.
In the economic sphere, although the country is experiencing good growth, Argentina has been experiencing high inflation for the past 4 years, moderated only by the global financial crisis in 2009. The origins of inflation in Argentina are a combination of several factors, such as the after-effects of devaluation in 2002 and subsequent loose fiscal and monetary policies that expanded domestic demand above GDP growth potential.
While Latin America has come a long way in the last decades consolidating its political democratic system and achieving economic stability, there is a strong need for infrastructure and other investments to sustain a healthy level of growth. The region has developed a unique profile to attract a highly-diversified investor base. We are seeing a large and young population moving up rapidly to the new “consumer” middle class, but at the same time having one of the lowest loan penetrations in the world. The rise of this consumer middle class and growth in per capital GDP is resulting in an increase in domestic spending, which drives the domestic economy. Secondly, the region has vast resources available at low cost.
Opportunities from this new consumer middle class has led to an increase in demand for products and goods in general and all types of infrastructure investments. As global demand for commodities continues to trend up, its large natural resource base helps to support the region’s fundamental long-term growth. One key concern we have is the lack of increased productivity over a long-term period.
Brazil and Argentina have been leading Latin American growth, and the region has been one of the top performing emerging markets in the third quarter of this year. There have been some major changes on the Latin America geopolitical scene over the past few weeks. Argentina mourns the passing of former president Nestor Kirchner, who was expected to run in the 2011 election, while Brazil celebrates the victory of its first female president, Dilma Rousseff. In other parts of the region, we have Chile, Colombia and Peru planning to integrate their stock exchanges at the end of November this year, providing local investors with more investment opportunities.