Frontier Market Like No Other: Investors Envision North Korea

(Bloomberg) -- Kim Jong Un’s historic meeting with Donald Trump may have been more optics than progress to denuclearize. But it did start a conversation among fund managers about how impoverished North Korea could transform itself in the next decade into a nation with a healthy currency, innovative tech firms and even high-risk, high-reward debt.

Investors from Mobius Capital Partners to Acadian Asset Management say the country could offer opportunities for the patient investor. Emerging-market veteran Mark Mobius compared a potential transformation to German reunification and the fall of the Iron Curtain. And while it may take more than a decade for the dictatorship to create a stock market and gain inclusion in an index, Acadian money manager Asha Mehta said there are benefits to getting in early.

"Our experience is that investments in early-stage economies ahead of index inclusion can be a meaningful source of capital appreciation," she said, pointing to the development of Vietnam, Saudi Arabia and Nigeria.

It’s a steep path. North Korea’s first step would be to privatize state enterprises and liberalize its economy, Mehta said. From there, the nation would need to establish tradeable securities to increase liquidity.

Even then, there are hurdles. Pakistan, which gained inclusion to the MSCI Emerging Markets Index last year, holds a weighting of just 0.1 percent. Nearer term, North Korea will face the same challenges as Cuba and Iran, where equity market developments stalled due to sanctions, Mehta said.

Initial investment opportunities would be easier through private equity, joint ventures and foreign direct investment, according to Sonja Gibbs, a senior director at the Institute of International Finance, a trade group created during the international debt crisis of the early 1980s.

"North Korean authorities -- assuming they actually want to develop capital markets -- would need at least five to 10 years even with a determined effort to build the credibility and infrastructure to get the major index providers to look at them," she said.

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