From July to mid-September, North Korea launched five missile tests, including two intercontinental ballistic missiles. And after a break of nearly three months, North Korea launched another missile, which appears to have crashed into Japan's exclusive economic zone on Tuesday.
"Little Rocket Man" is back, as will headlines attributing short-term volatility in the market to a potential geopolitical crisis. The markets did wobble on the missile headlines, the VIX shot up, and with stocks at record highs, it would not be a surprise to see more volatility.
But during Kim Jong Un's six-year reign, he has tested more missiles than his father and grandfather combined, including 15 tests in 2017. And based on this history, there's one piece of advice that may come in handy for investors (and the current president) as Kim Jong Un flaunts his latest 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 $15 billion from investors in the year-to-date period. 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 roughly $10 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 44 percent.
Japan, which said it was the target of Tuesday's missile test, is the largest country weighting in the MSCI EAFE Index, at 24 percent. It has boomed this year, outpacing the S&P 500, as part of a develop markets recovery around the globe. Year-to-date the three top EAFE ETFs have taken in more than $46 billion, according to XTF.com.