Global Markets: FTSE In Focus; + North Korea: The Death Of Jang Song Thaek

The UK FTSE 100 equity index is resting on short-term support following several weeks of steady losses. The downtrend has not been idiosyncratic, but instead reflective of the wider global equity sell-off.

Due to the dominant weighting on the index of international corporations with significant global exposure, the FTSE should not be interpreted as a particularly accurate gauge of the UK economy, but rather an indication of the health of global corporate earnings. Although we remain sceptical of the sustainability of the robust recovery taking hold in the UK due to its reliance on consumption and credit expansion, we see growth comfortably outperforming eurozone averages over the medium term.

Instead, the recent downturn in equity markets is likely attributable to mixed growth readings which have called into question the strength of the European recovery. The significant ramp up in valuations in 2013 could become a concern for investors, but long-term support near 6,200 would likely cap potential losses at approximately 3.5% below current levels. Given our broadly constructive view towards European equity markets and our ongoing belief that regional growth will gain momentum in 2014, we see a prolonged sell-off in UK stocks as unlikely.

North Korea: The Demise Of Jang Song Thaek

The biggest surprise about the dismissal and execution of Jang Song Thaek, hitherto North Korea's de facto number two man and uncle of its leader Kim Jong Un, is the openness with which it was carried out. North Korea has always presented a united front to the outside world, and any purges or executions are typically conducted behind closed doors or are attributed to non-political factors. For example, when Ri Yong Ho, another of Kim's very powerful mentors, was sacked as army chief in July 2012, state media attributed this to Ri's ill health, even though this was almost certainly due to his political ambitions or policy disagreements.

In Jang's case, official media released a long diatribe against virtually every aspect of his career and his character. Aside from plotting to overthrow the regime with the support of the military, Jang was accused of opposing the rise of Kim Jong Un, creating his own faction, expanding his personal power, undermining the work of the cabinet, orchestrating the currency crisis of December 2009, selling off national assets cheaply to foreign entities, and gambling, womanising, and distributing pornography. Jang was even criticised for only reluctantly standing up and clapping for Kim at the KWP party conference in 2010 that marked Kim's political debut.

While the accusations about Jang's ambitions and private life may not necessarily be unrealistic, the extent to which he has been condemned and blamed for so many of North Korea's ills is risky for the regime, for it raises the question of how the country's three 'flawless' leaders, Kim Il Sung, Kim Jong Il, and Kim Jong Un, could have placed so much trust in Jang in the first place and allowed his misdemeanours to have gone unpunished for so long (although Jang was briefly purged in the mid-2000s). In other words, because Jang was so central to the regime, any explicit criticism of him is an implicit criticism of the regime itself. Furthermore, by speaking openly of factionalism and possible anti-regime plots, the regime is admitting that there is considerable dissent even at the highest levels.

The timing of Jang's fall also raises questions. Jang was active in public life throughout 2013 (albeit less frequently than in 2012), right until November 6, when he met sports officials visiting from Japan. Two of his top aides, Ri Ryong Ha and Jang Su Gil, who were also implicated in Jang's alleged coup plot, were reportedly executed in November. Other reports suggest that another Jang aide defected to China or South Korea recently with sensitive information, and that this may have been the trigger for Jang's removal. It is possible that the regime acted speedily to thwart an imminent coup led by Jang, but South Korean authorities have not detected any unusual troop movements in the North. Most probably, Kim Jong Un, or possibly a separate faction, had planned to sideline Jang for some time, and found an opportune moment to act against him.

Regardless of the truth, Jang's elimination will increase the risk of instability in North Korea.

This Week's Trivia Question

Last week's trivia question had the theme of sunken objects. We asked, what large object was [last] week reported to have been discovered off the coast of Hawaii? What sunken object in East Asia is currently claimed by South Korea and China? And where in the world, many thousands of kilometres away, is there an island that shares its name? The answers are; a) a very large World War II era Japanese submarine; b) Socotra Rock, known as Ieodo in Korean and Suyan Rock in China; and c) Socotra, Yemen.

This week's trivia question returns to the world of film. What iconic film sequence from the late 1970s was on December 7, 2013, re-created in a major metropolis in the north-eastern USA? Hint: the main character of the film played a key role in reducing US-Soviet tensions in the mid-1980s in a sequel to the earlier film.

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