(Bloomberg) -- Some might say Nomura Holdings Inc. is getting ahead of itself.
Before an historic meeting between North and South Korean leaders next week, the brokerage has a list of stocks to buy should the countries decide to reunify.
True, it’s the first leadership summit in 11 years, and local media have reported that the Koreas, which are technically still at war, may announce a truce to formally end hostilities. But very few people are expecting the two countries to become one anytime soon.
“You might think it’s a bit early," Jim McCafferty, head of Asia excluding Japan equity research, said in an interview in Hong Kong. “But the market always anticipates.”
In a related development, CIA Director Mike Pompeo traveled to North Korea a few weeks ago to meet Kim Jong Un to prepare for a possible summit with U.S. President Donald Trump, according to two people familiar with the matter, raising optimism that the meeting could produce a deal.
McCafferty says he’s had two queries on the topic of reunification from clients in the past three weeks, one in New York and one in Tokyo.
His answer? If reunification is on the cards, it’s to buy infrastructure and other stocks. Particularly:
- Japan’s Komatsu Ltd. and South Korea’s Doosan Infracore Co. because the makers of construction machinery will probably benefit from projects to extract minerals in the North
- Telecommunications providers such as SK Telecom Co., LG Uplus Corp. and NTT Docomo Inc., which could purchase spectrum from North Korea
- Steelmakers including Posco and food companies such as Ottogi Corp. and NongShim Co.
- But sell defense stocks, including Korea Aerospace Industries Ltd. and Hanwha Techwin Co.
McCafferty says he’s bullish on South Korean equities regardless of whether the two countries reunify. Nomura expects the Kospi index will reach 3,000 by year-end, more than 20 percent higher than current levels, partly because it’s bullish on Samsung Electronics Co., which accounts for more than 20 percent of the measure. The benchmark South Korean stock gauge has gained less than 1 percent this year after rising 22 percent in 2017.
Not everyone is as positive. Goldman Sachs Group Inc. downgraded South Korean stocks to market weight last month, saying all Asian markets except Korea saw improvements in earnings. The brokerage sees few imminent catalysts for outperformance, it said.
But according to McCafferty, the nation of more than 50 million is undergoing change not only within its giant corporate groups, known as chaebol, but also as the society embraces campaigns such as the “Me Too” movement. The stock market, which has historically been cheaper than other markets due to corporate governance issues, is set to benefit, he said.
The Kospi trades at 1.1 times book value, compared with 3.3 times for the S&P 500 Index in the U.S.
“The Korea discount will be removed at some point,” he said.
And on the possibility of reunification, he admits it surprised him when a client first brought it up.
“I couldn’t believe it when I got the question,” he said. But “if investors are mentioning it, someone’s talking about it.”
©2018 Bloomberg L.P.