Toscafund eyes upside from "certain" Korea reunion
* Says China to drive regime change in North Korea
* S.Korean won, equities, bonds to benefit ahead of reunification
* South Korea credit rating to benefit, North could be 'frontier nation'
By Laurence Fletcher
LONDON, Sept 13 (Reuters) - North Korea and South Korea are on a long path to reunification, according to UK hedge fund Toscafund, which increases the attraction of South Korea's currency, stocks and bonds.
In a research paper to be released on Wednesday, Toscafund chief economist and partner Savvas Savouri argues regime change in North Korea, supported by China, is likely and would be widely supported by North Koreans.
"North Korea's status quo is not sustainable. It is inevitable it will be broken," Savouri writes in a research report, which sees benefits to South Korea's credit rating and the attractiveness of the North as an investment opportunity.
He cites the cost to China -- a crucial backer of North Korean communist forces in the Korean War and which has increased aid to its poor neighbour in recent years -- of supporting Pyongyang, coupled with dwindling patience over acts of "unprovoked aggression".
"A Beijing-inspired Palace coup in North Korea is a near certainty," Savouri says.
"If regime-change is initiated by China using elements within the North Korean leadership, change can be achieved relatively swiftly and without the threat of some nuclear or other WMD (weapons of mass destruction) reaction."
In his research paper Savouri says he is "certain" of reunification between the North and the South but not until the early 2040s. It would leave wealth and income gaps between the North and the South, but these would not stop the process, he says.
Savouri's comments come in a year that has already seen popular uprisings topple leaders in Egypt, Tunisia and Libya.
Earlier this year he predicted South Africa would "blow up" within the next 15 years, and has described the financial services industry is practically "lawless".
Reunification could also throw up opportunities for investors, he says, adding that "the investment case for Korea over Japan is overwhelming".
"As the consensus shifted towards seeing reunification as a reasonable and welcome possibility, one would expect the won, South Korean equities and bonds (in the long term) to benefit," Savouri says.
Korea's Composite Stock Price Index (KOSPI) is down 11.6 percent so far this year, while MSCI's world index of developed stocks is down 11.8 percent.
A strong won would also help push down yields on South Korea bonds, while China would be likely to raise its holdings.
Meanwhile, South Korea could benefit from upgrades to its credit rating, he says, while North Korea could benefit from being classified as a 'frontier nation'.
"Whilst China and South Korea will not be alone in targeting North Korea with aid and investment capital, they are sure to be the biggest donors and largest winners as a result," he adds. (Reporting by Laurence Fletcher. Editing by Jane Merriman)