From July to mid-September, North Korea launched five missile tests, including two intercontinental ballistic missiles. More recently, the North Korean threat has taken a backseat to hurricanes and tax reform as stock market triggers, and major indexes are touching new record highs.
But "Little Rocket Man" will be back, as will headlines attributing short-term volatility in the market to a potential geopolitical crisis. Ahead of planned joint naval exercises between the United States and South Korea next week, North Korea threatened on Friday to launch ballistic missiles near the U.S. territory of Guam.
During Kim Jong Un's six-year reign, he has tested more missiles than his father and grandfather combined, including 15 tests in 2017. Based on history, there's one piece of advice that may come in handy for investors (and the current president) when Kim Jong Un celebrates his next nuclear success: Don't overreact. In fact, for investors, don't do anything.
Consider the country stock market arguably facing the gravest existential threat from a nuclear crisis: South Korea. There is reason not to be complacent. U.S.-based investors may have more exposure to South Korea than they realize.
Financial advisors and retail investors have been piling into overseas stocks, primarily through exchange-traded funds based on the MSCI and FTSE developed (EAFE) and emerging markets (EM) indices. Those indexes have significant exposure to South Korea. MSCI defines South Korea as an emerging market, and its emerging markets index has between 14 percent to 15 percent exposure to South Korea. The iShares Core MSCI Emerging Markets ETF (IEMG) has taken in $13.5 billion from investors. FTSE defines South Korea as a developed market, and its EAFE index has between 4 percent to 5 percent exposure to South Korean stocks. The Vanguard FTSE Developed Markets ETF (VWO) has taken in more than $14 billion from investors this year.
But here is what the South Korean stock market returned between the July to mid-September periods, when missiles were flying: 1.37 percent. Year-to-date, the South Korean stock market is up roughly 30 percent.