North Korea, officially known as the Democratic People’s Republic of Korea, may be a pretty good investment opportunity if you believe in Ben Graham’s value oriented approach. I’ll explain what I mean in a minute, but let’s start with a bit about North Korea. It’s hard to realistically measure how their economy is doing because the current regime doesn’t publish statistics on that kind of thing; no one’s sure if the government even knows how their economy is doing. Operating on numerous levels, corruption and bribery is endemic to the country. The different levels of the North Korean economy include the growing black market between China and North Korean citizens, the incredibly corrupt and poorly implemented conventional economy, and the economy that Pyongyang believes is going on within the country. These three levels allow the country to barely function with poor growth, inflation, and massively ineffective government reforms. But here’s why I think you may want to buy now.
The thesis is simple: purchase an undervalued asset and sell when the market realizes the value of that asset. Analysts believe that North Korea holds about $6 trillion dollars’ worth of precious metals. Since North Korea is such a closed off country, foreign mining companies are unable to setup operations. This works to the investor’s advantage. The nation also possesses the 22nd largest coal reserve on the planet, so if Trump is planning to bring coal back, then maybe North Korea is the place to start. The country’s estimated GDP of 2011 is only 0.08% of that $6 trillion, which could allow you to conclude that North Korea is trading below its book value. That’s a loose assertion though because GDP isn’t the same as book value. We’ll talk a little bit about how you might be able to invest in the country because that’s going to be the complicated part.
In addition, investors believe that there is a massive oil stockpile within the country. Hedge fund manager James Passin believes the country could be resting on about a billion barrels of crude oil which is enough to make it a competitor with Oklahoma. Passin of Firebird Management argues that the country has 25 million people who are “young, highly disciplined, literate, and a strong-military industrial complex.” This could provide a huge payoff for investors if the regime was to ever change. Firebird Management has been a pretty risky fund, investing in stock market booms within Mongolia and searching the badlands of Somalia for oil.
China is pretty much the only country that would have a leg up in investing in North Korea based on their close ties since the cold-war. There is one publicly traded company that you can purchase that does business with North Korea. Orascom is an Egyptian country that provides cell phone service to over a million North Koreans, under the condition that the phones can’t dial internationally of course. Orascom is a telecom media and technology holding company. The diversification of their other businesses may be a nice compliment to your portfolio if you expect North Korea to open and start allowing more citizens to use cell phones.
Another way of investing in the country is through their bonds. BNP Paribas constructed some bonds out of 20 year old bank loans they were trying to get off of their books; as you can imagine, these bonds trade for mere pennies on the dollar. These loans have been in default since the mid-80’s, but their prices still react to political events. When Kim-Jung Il passed away and there was a faint glimmer of hope for a change in regime, the prices of those bonds shot up between 7.7 and 20.0% on the hope that a new regime would open up the country’s economy and agree to pay back the aging and defaulted bank loans.
Another route to go would be to purchase coins from the country. These are commodity coins, but they can be purchased at certain Asian coin dealers. The only case, in my eyes, for the coins to shoot up in value after a regime change is that the coins will become instantly collectible as “the last greater hermitage economy.”
I’m not suggesting that it’s a good idea to put your money into North Korean bonds, unless you’re feeling that emerging markets in general aren’t risky enough for you and you’d like to add a little spice to your portfolio. I personally will not be putting any of my money in North Korea, but it is easy to make a case that a regime change in North Korea would really brighten up their economy and allow for growth. It would be an incredibly rocky road though, just based on the culture that has been established since North Korea was formed in 1945.
Bullock, P. (2016, January 14). North Korea is newest frontier for a daredevil investor . Retrieved from CNBC: http://www.cnbc.com/2016/01/14/north-korea-is-newest-frontier-for-a-daredevil-investor.html
Burne, K. (2017, March 16). 4 Sanctioned North Korean Banks get Delisted by Swift . Retrieved from Morningstar : http://news.morningstar.com/all/market-watch/TDJNMW20170316636/4-sanctioned-north-korean-banks-get-delisted-by-swift.aspx
Central Intelligence Agency . (2017, January 12). The World Fact Book. Retrieved from North Korea: https://www.cia.gov/library/publications/the-world-factbook/geos/kn.html
Charlotte Fitzek, V. C. (2016, February 25). Stock Markets Yawn at North Korea’s Nukes . Retrieved from ForeignPolicy.com: http://foreignpolicy.com/2016/02/25/stock-markets-yawn-at-north-koreas-nukes/
Cullinane, S. (2013, April 9). CNN. Retrieved from How does North Korea make its money : http://www.cnn.com/2013/04/09/business/north-korea-economy-explainer/
Hee, Y. G. (2010, May 4). Tax? What Tax? THe North Korean Taxation Farce . Retrieved from DailyNK: http://www.dailynk.com/english/read.php?cataId=nk02900&num=6203
Heritage.org. (n.d.). 2017 Index of Economy Freedom. Retrieved from North Korea : http://www.heritage.org/index/country/northkorea
Salisbury, I. (2013, April 7). How to Invest in North Korea. Retrieved from MarketWatch: http://www.marketwatch.com/story/how-to-invest-in-north-korea-2013-04-05
Taube, S. (2016, September 14). How the North Korean Nuclear Test Affects Asian Stock Markets. Retrieved from Investment U, The Oxford Club: http://www.investmentu.com/article/detail/51642/north-korean-nuclear-test-asian-stock-markets#.WM0upjsrLIU