South Korea’s market could see a “huge” benefit from any potential breakthrough in the North Korea-U.S. summit talks to be held on Tuesday, DBS said.
“Peace on the Korean peninsula could deliver significant benefits for both North and South, including potentially a market re-rating for South Korean stocks,” DBS said in a note on Monday.
It noted that South Korea’s stock market has long been among Asia’s cheapest on valuations, with a huge discount due to tensions with North Korea, with most investors taking an underweight position there. The market is trading at 8.8 times forward price-to-earnings, “cheap by any measure,” DBS said, noting the U.S. market trades at 16.2 times forward price-to-earnings.
“Anything significant that happens there regarding the peace process could have a major impact on valuations. Peace could lift South Korean
stocks by pricing in possible ‘peace dividends’, although the gains may be limited by global conditions,” DBS added.
But it warned against “excessive optimism,” as there’s an “enormous gulf” between the two Koreas and the costs of reunification would be high.
It also pointed to the risks of disappointment with Tuesday’s summit.
“The risk would be what happens if the summit fails without producing any meaningful agreement or if one of them does something wrong,” DBS said. “The downside risk could be significant, and this would impact sentiment on global markets.”