For those not familiar with the terminology, "event risk" is a fairly simple concept and I am almost ashamed to use the term because of its simplicity. It simply means that there is the risk that a major event outside of regular market forces will shake a specific company or even an entire market. For example, BP's event risk has been the ongoing oil spill. Simple enough concept.
With that out of the way, let's move on to South Korea and the escalating crisis with the North over the sinking by the North of a South Korean naval vessel. This is yet another instance of where one must pay attention to politics when making investment decisions. South Korea is an attractive market in a number of ways. The government is fiscally stable, the economy is clearly in a high growth mode, companies are becoming increasingly profitable, and China provides a great long term driver of export growth. There's an awful lot to like. However, they do have an absolutely berserk neighbor to the north.
However, as serious as this crisis seems, it is not clear that the Korean markets have taken the risk as seriously as one might think.
EEM, an overall emerging markets index ETF, EWY, the South Korean iShares ETF, has not done that much worse, certainly not so much worse as to indicate broad investor skittishness. Compared to the potential for ruin the South Korean economy should a war commence, this response seems modest. Of course, even when U.S. markets became aware of the Cuban Missile Crisis, stocks did not sell off particularly fiercely either. Maybe markets generally are fairly unimpressed by political (broadly defined) turmoil. Even in Thailand, ongoing political violence has barely dented the market lately.
So, why the post title indicating that South Korea is a poster child for event risk? I would say it is because if what South Korea is facing isn't event risk, I don't know what is. And if this is major event risk, why is the market not more concerned than it is? Am I reading the situation entirely incorrectly?
Also, if anyone has any special insights on the ongoing Korean tensions, I'd be happy to hear them. There might be some money to make here for those that fancy investing in Korea.