Investors urged to stay cool as Korea crisis escalates

Were nuclear war to break out then all bets would probably be off but short of that investors may be worrying too much about the US-North Korea standoff, as market meltdowns caused by geopolitical shocks tend to be short-lived and a well-diversified portfolio is often a dependable line of defence.

That's the reassuring 'keep calm and carry on but by all means de-risk' message of market experts to international investors.

“In terms of what you do in the portfolio, the key point when you are investing is to be diversified. Nobody knows what is going to happen…if there is a nuclear event, we are all be in trouble, this will affect everybody and it won’t make any difference what you are holding,” Franklin Templeton Investments’ emerging markets guru Mark Mobius said this week at a press briefing.

Military conflicts and major political crises have often hit financial markets hard in the countries directly involved, just as in the case of the Vietnam War or the dissolution of the Soviet Union, but financial markets in developed economies have always recovered quickly, Xia Chun, chief research officer at Chinese wealth manager Noah Holdings, told AsianInvestor.

Of course in the same way France's supposedly impregnable Maginot Line proved ineffective against the Nazi Blitzkrieg and the events of 9/11 had a lasting impact, by hammering insurance and airline stocks, triggering further conflicts, and aggravating the US economic recession that had already taken hold in 2001, nothing is certain. The known unknowns currently are many.   

Even so, equities and bond markets in the US, Europe and Japan have usually rebounded within one to five days in the wake of the political turmoil elsewhere. And even though the US is involved in the current geopolitical drama, the US dollar remains the world's main reserve currency, which will cushion any impact on US assets, Xia said. Guam aside, it is also well beyond the main arena.

Long-term investors will likely not be affected, while shorter-term investors can seek out other safe-haven investments gold and Swiss franc, go long of exchange-traded funds that track volatility gauges such as the VIX index, or short ETFs holding South Korean equities, Xia said.

Citing regulatory risks, Xia is less keen on cryptocurrencies like Bitcoin. 

Mobius favours some shifting of funds from Asia and South Korea. But with emerging markets generally expanding at a faster pace than developed markets he still thinks it makes sense to look through current political tensions by maintaining heavier emerging market weightings. 

Heightened anxiety

North Korea’s sixth and biggest nuclear test on September 3 intensified the unprecedented tensions between it and the US that already had investors spooked, as AsianInvestor reported last month.

Geopolitics has become the number one concern of global institutional investors, eclipsing their fear of rising interest rates or slowing economic growth, investment manager Allianz Global Investors’ (AllianzGI) RiskMonitor study showed on Wednesday.

Among the 755 institutional investors surveyed, 44% said geopolitical factors represent a major risk to investment performance, ahead of a global economic slowdown (41%) and rising interest rates (32%). The interviewees represent $34.2 trillion in assets under management across North America, Europe and Asia-Pacific.

“This study highlights the extent to which geopolitical uncertainty, including the ongoing tension in North Korea, which has only increased since we conducted our survey, is weighing on investment decisions,” Neil Dwane, Global Strategist at AllianzGI, said.

Investors are increasing their focus on risk management and downgrading their return expectations despite the recent strong run in equity markets, he said.

Credit rating agency Moody’s has raised its assessment of South Korea's geopolitical risk to “Moderate (+)” from “Moderate (-),” reflecting an increase in the probability of military confrontation with its neighbour to the north. Its base case, though, remains that the status quo will prevail, with ongoing tensions and periodic shows of force, and potentially further sanctions from the US and its allies, according to a report released on September 7.

However, Will Sham, Hong Kong-based portfolio manager at fund distributor iFast, told AsianInvestor that the equities market, especially the strong Hong Kong market, may still suffer losses even though investors think the chance of a real war breaking out is low. 

“The nuclear tests are like ['the story of the boy who cried] wolf’; North Korea won’t risk losing its regime…but some investors may use geopolitical risk as an [psychological] excuse to sell off their stocks,” he said. 

The Hong Kong stock market has risen by 27% year-to-date. The increase is more than many investors expected at the beginning of the year, so a feeling of vertigo is seeping into the market. Geopolitical risks could therefore be used as an excuse by some investors for selling stocks and taking profits, Sham said. 

But even then the sound corporate fundamentals, including strong earnings growth, currently underpinning equity markets would likely limit the downside, Sham added.

For him, like others in the market, the key risk remains the tapering off of quantitative easing in the eurozone and Japan and further interest rate rises in the US.

In that regard, the more real the geopolitical threat and the more fragile market sentiment becomes, the less likely central banks will want to push the button.