South Korea's stocks rallied to record highs last month and analysts turned increasingly bullish, but that may have just gotten derailed by the rising spat between President Donald Trump and North Korea's Kim Jong Un.
The benchmark Kospi index climbed to a record intraday high of 2453.17 in late July, which at that point was a more than 20 percent year-to-date rise. It gave up some of those gains after disappointing earnings from automakers, but then it took a bigger wallop after Trump ratcheted up the tensions earlier this week.
The index is down more than 5 percent from the record high, and down around 3 percent this week.
On Tuesday, a Washington Post report, citing a confidential U.S. intelligence assessment, claimed the pariah state had successfully produced a miniaturized nuclear warhead that could fit inside its missiles.
The situation escalated after a blunt warning from Trump, which used language similar to the North's own frequent saber-rattling: If it were to make any more threats against the U.S., the president said, Pyongyang "will be met with fire, fury, and frankly, power, the likes of which this world has never seen before."
That spurred the North Korean army to almost immediately cross that line: It issued a statement carried by Pyongyang's state news agency that it was "carefully examining an operational plan" for targeting the U.S. island territory of Guam with "enveloping fire."
On Thursday, Trump ramped up the rhetoric, saying his comments may not have gone far enough.
But before the fresh tensions, the chorus of optimistic outlooks from analysts was fairly loud.
Daryl Liew, senior portfolio manager at Reyl Singapore, issued a report in early August calling South Korea's stock market "compelling," and one of the cheapest in Asia.
He noted that the MSCI Korea's forward price-to-earnings ratio was just 9.6 times, compared with the MSCI Asia ex-Japan at 14.4.
The portfolio manager for Reyl Group, which has more than 12 billion Swiss francs ($12.50 billion) under management, also pointed to signs of progress in reforming South Korean corporates under new President Moon Jae-in as a driver ahead.
Those were sentiments repeated in a Citi report on Monday — before the war of words erupted. Analyst Sean Lee said that while some of Moon's policies might hurt earnings of Kospi companies, they would be positive for stock valuations.
"Policies to support the low income bracket and SMEs could be negative for KOSPI earnings, but caring more about minority shareholders within a listed company could be positive for the improvement of corporate governance in Korea," Lee said, adding that better governance could re-rate the stocks higher.
To be sure, this would hardly be the first time that tensions have flared on the Korean peninsula, weighing on the stock market in the South.
Indeed, Goldman Sachs said in a note on Wednesday, "For decades, complacency has been the 'right trade' when it comes to North Korea. More often than not, market participants have been rewarded for fading negative price moves rather than hedging them."
It added that investors have "grown comfortable" with the tensions "invariably" leading to talks, making buying the dip the right trade.
Experts have also noted that, so far, there were no signs North Korea was mobilizing its military.
But analysts have expressed concerns that this time might really be different, noting the chances of a miscalculation were larger than normal.
"North Korea's weapons program is far more advanced now than it ever has been, and while there was a sense in the past that threats emanating from the hermit kingdom were somewhat comical and unsubstantiated, this is now not the case," Oliver Salmon, lead economist at Oxford Economics, said in a note on Thursday.
"Secondly, there is the added uncertainty created by President Trump and his busy twitter account," he said, adding that Trump, beleaguered by a struggling domestic agenda, may feel the need for a foreign-policy win — possibly through a military option.
Those concerns are factoring into some investors' positioning.
"This is another story in the never-ending saga of North Korea and this happens every few months and sometimes it's off for a while, sometimes it's on," Steve Goldman, managing director at fixed income investor Kapstream Capital, told CNBC's "Squawk Box" on Thursday.
"But this time I think the probabilities are increasing, so we've got to start thinking long term that something may actually happen here," he said.
He said that he's been trimming some exposure to South Korea to reduce risk, noting that about 3 percent of Kapstream assets had been invested in South Korean issuers. He noted that as a fixed-income investor, however, he wasn't fully divesting from South Korea as it would be difficult to buy the assets back later.
Even with the apparent new paradigm of North Korea's nuclear status, analysts still weren't entirely turning their backs on the market.
"If tensions between the U.S. and North Korea escalate further, we think that the implications for equities in South Korea and elsewhere will remain limited provided that war does not actually break out," Oliver Jones, an economist at Capital Economics, said in a note on Thursday.
Jones noted that a similar arc played out during the 1962 Cuban missile crisis, when two nuclear-armed powers also came close to military conflict.
Goldman Sachs also wasn't convinced that this time was different enough.
"Even though tensions continue to mount and North Korea's nuclear program continues to advance, it appears markets have yet to see enough evidence that this time is different," it said.
Others remained staunchly bullish.
"Think about what's the bigger force at work for South Korea's market and, in fact, all of North Asia right now," Richard Martin, managing director at market researcher IMA Asia, told CNBC's "Squawk Box" on Thursday. "The bigger force that's at work for them is this wonderful export recovery that's run through the first half of this year. It's the best upturn in trade we've seen in five years."
Martin pointed to "phenomenal" double-digit export growth since the start of the year.
"It's really pumping money into Korean companies and they expect them to perform better and that's really why people are buying the market," he said.
—Jacob Pramuk contributed to this article.