Kim Jong Il’s Death Unnerves Asian Markets

Asian markets reacted to the death of Kim Jong Il of North Korea with trepidation on Monday, with both stocks and the South Korean won falling; losses came on top of early-morning drops fueled by euro zone worries. Small-cap defense-related stocks, however, saw substantial gains on the Nikkei.

Kim, who died Saturday of a heart attack during a rail journey, is expected to be succeeded by his third son, Kim Jong Un, believed to be in his twenties, whom he named as his successor in September of 2010. The death was not made public by the Korean Central News Agency, the state news agency of North Korea, until Monday. Despite the fact that Kim named a successor, there is concern that the transition will not be smooth.

According to a Bloomberg report, Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $28 billion, said, “What investors don’t like most is uncertainty. Amid very limited information over his death, it’s very tricky to guess what will happen in the communist nation as well as the impact on regional security.”

The Nikkei fell to a three-week low, and the Hang Seng, Shanghai and Kospi were down as well, the last by nearly 3.5% in morning trading.

Reuters reported Masayuki Otani, chief market analyst at Securities Japan, saying of the markets’ drop, "Investors are taking a wait-and-see approach to see if the situation in North Korea will take a turn for the worse, and market participants are not able to grasp the whole situation yet. For now, people are getting rid of their positions."

Hiroyuki Fukunaga, CEO of Investrust, commented in the report, "South Korea's reaction to this will be in focus. The risk or fear that the death of Kim Jong Il will lead to provocation by North Korea is prompting selling."

Japanese defense stocks gaining on the news included Ishikawa Seisaku, a defense contractor that gained 17.2%; Howa Machinery, a firearms manufacturer, which rose 7.9%; and Nippon Avionics, a manufacturer of defense electronics equipment, which added 12.2%.