Only market participants change their behaviour due to geopolitical tensions

On 11th August 2017, Samir Mehta, Senior PM of the JOHCM Asia ex Japan Fund, has put together a few comments regarding the current geopolitical tensions on the Korean peninsula.

1. North Korea and its threats have existed before.
2. What is different is Mr. Trump and the unpredictability of what he might do. My personal opinion is that this escalation of words is driven by his need to secure a ‘win’ given his stumbles on almost all his domestic policy issues so far.
3. A related possibly reason for this rhetoric from Mr. Trump could be to push China to give him some ‘wins’ on trade.
4. Unless we do see an escalation leading to conflict, this playbook has been repeated several times before. Itusually results in panic and subsides.
5. Businesses do not change their behaviour due to geopolitical tensions – only market participants do. Riskperceptions for asset values change.
6. On the core part of the portfolio I am not changing anything. Consistent with what I have mentioned in the recent past, reducing India and adding to Malaysia and selectively in HK/China – but not because of this tension.
7. On the cyclical side, yesterday and today I have added to Korean financials. As part of my changing stance on financials in the region (ex-India), I am of the opinion that there is good reason to own Korean financials. NPL cycle has possibly peaked; cost cutting is progressing for the first time in a long time; fee income has been growing and potential margin surprise is possible. Valuations have and remain cheap. Do I make one or two of them even as part of my Core portfolio is a debate I haven’t settled yet.
8. The variable to monitor is the US$. A benign start to the year for Asia is partly due to a depreciation of the US$. But recently, that sell off led to an overstretch on the downside. Is this a pullback/strengthening of the US$ just the result of an ‘oversold’ position or does this move result in a medium term reversal?
9. I am managing the cyclical risk on the basis this is a pullback NOT a reversal in the US$ trend.
10. In times of stress, especially liquidity or economic stress as well as geopolitical stress, the US$ has been a safe haven in the past and I will, like all of us, have to monitor what Mr. Trump does to take a call on whether we should be a lot more cautious.