South Korea ETF Plunges on Reports of Kim Jong Il’s Cancer

by on July 14, 2009 | ETFs Mentioned:

Kim Jong Il, the eccentric and volatile leader of North Korea, is reportedly battling one of the most virulent forms of cancer, setting off waves of speculation throughout Asia and the world as to the future of the “axis of evil.” While Il’s inflammatory personality and refusal to abandon his country’s nuclear ambitions in the face of Western pressure have made many around the globe long for the end of his reign, Mondays news sent South Korean equity markets plunging, as fears of short term instability and uncertainty outweighed any long-term optimism.

Kim Jong-ilSouth Korea’s YTN-TV reported that Kim has been diagnosed with pancreatic cancer, and Open Radio for North Korea said that Kim is experiencing a slow progression of paralysis. The reports come on the heels of an appearance at a televised event honoring the 15th anniversary of the death of his father, North Korean founder Kim Il Sung. At that event, Kim seemed frail during his brief appearance. The 68-year old suffered a stroke last year that sidelined him for nearly two months. Pancreatic cancer is one of the most deadly forms of the disease, with survival rates as low as 5%. Kim’s health is a closely-guarded secret in North Korea, as state controlled media has never acknowledged his stroke, much less discuss any cancer diagnosis.

South Korean Reaction

The iShares MSCI South Korea ETF (EWY) slipped 2.7% on credit worries and concerns over the future of their neighbors to the north. Since North Korea is not believed to have developed a final succession plan, news that Kim is battling a fatal form of cancer raised concerns that instability will soon hit North Korea, with the impact of potential chaos being felt by their longtime rivals to the south.

It is widely believed that Kim plans to transfer power to Kim Jong Un, who was born in either 1983 or 1984 to Kim’s third wife. Few outside of North Korea even knew of the younger Kim’s existence until he was mentioned in a 2003 book by one of Kim’s personal chefs, Kenji Futomoto. According to Futomoto, Jong Un is “a chip off the old block, a spitting image of his father in terms of face, body shape, and personality.” Jong Un was educated in Switzerland and at Kim Il Sung Military University. He is rumored to be very competitive, a trait that has helped to earn him favor over his two brothers, and that no doubt worries foreign leaders observing the developments in Pyongyang.

Kim has two older sons, Kim Jong Nam (born in 1971) and Kim Jong Chul (1981). Jong Nam, once thought to be the predecessor to his father, has spent most of his life outside of North Korea, and caused a great deal of embarrassment when he was detained in Japan while trying to sneak into the country to visit a Disney theme park. According to Fujimoto, Jong Chul has long since been dismissed by his father for being “girlish.”

The idea of a child, about whom little is known (besides the fact that he is “competitive”), taking control of a country known for its nuclear ambitions, repression of free speech, and tight state control of nearly all media channels is cause for concern. Jong Un’s political stances are a great mystery, although all accounts seem to indicate that he will likely continue the policies imposed by his father, as opposed to beginning dialogue with the Obama administration and the rest of the Western world. In a less likely but perhaps more destabilizing scenario, it is possible that Kim’s death would set off a struggle for power in North Korea, with the impact of the instability felt throughout the region.

In addition to EWY, other ETFs to keep an eye on as the situation in North Korea evolves include:

  • Claymore/AlphaShares China Small Cap (HAO): As North Korea’s most important ally, largest trading partner, and main source of arms, food, and fuel, China could potentially be put into an awkward position if events in North Korea escalate quickly. China’s amicable relationship with Kim has put them at odds with much of the developed world, and tensions could be heading towards a breaking point.
  • iShares FTSE China (HK Listed Index) (FCHI): FCHI could also see some movement in coming weeks, as China is facing turmoil both within its borders and from developments in neighboring countries.

Disclosure: No positions at time of writing.