North Korea transition: Markets will shrug it off

North Korea leadership change won't affect markets in the long term, analysts say, because North Korea is likely to continue business as usual.

Yao Dawei/Xinhua/AP/File
In this file photo released by China's Xinhua News Agency, Kim Jong Un, the third son of North Korean leader Kim Jong Il, applauds while watching the 2010 Arirang mass games performance in Pyongyang, North Korea. Kim Jong Il's passing will not affect markets for more than a few days, analysts say.

The death of North Korean leader Kim Jong il sent Asian equities tumbling on Monday as worries over stability in the region spooked investors. But analysts told CNBC that the downside from North Korea would be short-lived.

“If you look back at our past experience in 1994 when Kim il sung, Kim Jong il’s father died, we lost 2-3 percent the next day but we gained right away in one and a half days,” Cho Hong Rae, Senior Executive Director at Korea Investment Holdings, said.

 Richard Harris, Chief Executive of Quam Asset Management, agreed that the selloff in Asian equities would be limited. “Political news doesn’t have a lasting impact, of course if they start militarizing and it becomes more serious it would, but very often political news like this doesn’t have a long term impact.”

Kim Jung un, the son of Kim Jong il, who is likely to take over as the new leader of North Korea, is also not expected to assert power via military action, say analysts.

 Colin Chapman, Vice President, Asia Pacific at global intelligence company Statfor, believes that unless the young general is “egged on” by the military, he is unlikely to take a bold stand.

 “I think it’s much more likely that his (maternal) uncle (Chang Sung taek) will play a prominent part and it will be business as usual,” Chapman said.

 Hans Vriens, Managing Partner of Vriens & Partners, an advisory firm specializing in political risk analysis, adds that at the moment it is not in North Korea’s interest to raise political tensions.

 “They've got more to deal with as a result of their leader’s death,” Vriens said. “Nobody, China nor Japan, or the U.S. or South Korea is interested or will benefit from a war in North Korea. And neither is it to be expected of North Korea to do something as stupid.” 

 China’s Role Critical

Both political and market watchers believe China, North Korea’s closest ally, will play a pivotal role in ensuring a smooth political transition in the single-party state.

China will continue to maintain its investments in North Korea, said Chapman, adding that stability across its border is a top priority for Beijing, particularly as it undergoes its own political transition in 2012.

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