What Kim Jong Il’s death means for investors


North Korean leader, Kim Jong Il, has apparently died of a heart attack, aged 69.

Few will miss the man who has steadfastly refused to open his country to the outside world; impoverishing his people and escalating military tensions in the process.

More uncertainty
While investors are equally unlikely to mourn the death of the North Korean dictator, it’s a truism that faced with the choice of bad news or uncertainty; markets will gladly take the former.

The problem with the passing of autocratic rulers is that their deaths often leave power vacuums, as family members and military leaders jostle for position in the new regime. When coupled with a country widely rumoured to be developing nuclear weapons, the mix is very volatile indeed.

Markets are down
Markets seem to be reacting to that uncertainty in the time-honoured tradition of selling first and asking questions later. To be fair, Asia Pacific markets were already down before the news broke, but that decline seemed to accelerate in the midst of the announcement, most notably South Korea’s KOSPI index, which was down over 3% for most of the day.

All of the major Asia Pacific markets were down on Monday, most around 1% or more. Softer economic conditions also buffeted those markets, with the Australian market down over 2% in the wake of profit downgrades from discretionary retail stocks, most notably Billabong International (ASX: BBG) and JB Hi-Fi (ASX: JBH). The former crashed 44 per cent today alone.

Trouble at their doorstep
Back in Seoul, it’s hard to blame the South Koreans for worrying. After all, the North torpedoed one of South Korea’s warships 18 months ago, and the relationship has always been tense – short periods of relative calm notwithstanding – between two countries who are technically still at war, having agreed only to a truce in 1953.

The next couple of weeks will be telling, as the posturing and politicking plays out in North Korea’s capital, Pyongyang. In a country as unstable as North Korea, there is a wider range of potential outcomes than in almost any other similar country, compounded by the likely existence of a nuclear weapons program of some sort. Kim Jong Il’s son, also known as Kim, is considered a potential successor, but his ascension is far from assured.

Think, then act
So what should investors do? As with all of these events, the likely best response is to ignore it and get on with the business of investing. History shows that the global equity markets have continued their long, upward run – with the occasional setback – through wars, recessions and political instability. In the short run, these events seem monumental, but in the long run, they are almost always historical curiosities when viewed from an investing standpoint.

Now may not be the time to load up on South Korean equities, but these types of events can also be responsible for wild short-term price swings that give us the opportunity to buy into quality business at unreasonably (and often fleetingly) depressed prices.

Foolish take-away
From a humanitarian perspective, we can only hope that the demise of a brutal dictator brings about the end of his cruel regime. For investors, the best course of action is the one we’ve long advocated here at The Motley Fool – focus on the business and think long term. Don’t rush in, and wait until the odds are in your favour.

If this news is the catalyst that finally gives you a purchase price you’ve been waiting for – and the business fundamentals aren’t changed by these events – then don’t be put off. Now might just be the time to buy.

Are you looking for quality stock ideas? Readers can click here to request a new free report titled The Motley Fool’s Top Stock For 2012.

Scott Phillips is The Motley Fool’s feature columnist. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson

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