Equities appear to be suffering from “apocalypse ennui”, says Leo Lewis in the Financial Times. Early this week, when North Korea tested its latest nuclear bomb, markets wobbled but didn’t lose their footing. Major stockmarkets in Europe declined by up to 1%, while South Korea’s Kospi lost 2%. Similarly, when North Korea fired a missile over Japan last month, the Nikkei dropped by only 0.9%. According to Nomura, there have been 30 incidents involving missiles or nuclear tests since Kim Jong-un took over North Korea in 2012. The Nikkei’s average reaction to them has been a “measly” drop of 0.6%, says Lewis.
“We have been here now many, many times,” says Rob Carnell of ING. “Unless this is a precursor to US military action, which we doubt, then…. tensions will calm again, making this a good buying opportunity.” This sums up the prevailing approach to political strife: ignoring it has been a winning strategy over the past 15 years, as BNY Mellon’s Simon Derrick told The Economist’s Buttonwood blog.
Investors were worried about the potential impact of the Gulf War in 2003, but the market soon recovered. Indeed, the subsequent bull run endured until 2008. A massive dose of central bank liquidity helped calm nerves too.“Given the extraordinary levels of monetary policy easing by all major central banks since [the global crisis], and that no geopolitical event has led to an outcome [deemed] a direct threat to mainstream markets, it makes sense that investors collectively have learnt to ignore these risks,” says Derrick.
As we’ve also pointed out recently, economic fundamentals trump geopolitics as the key driver of market movements. Even the Cuban missile crisis didn’t seem to move Wall Street much following a nasty bear market earlier in the year. Given all this, the threat of war in Korea shouldn’t prompt investors to sell holdings suddenly or change their overall strategies. But it is a good time to ensure you have 5%-10% of your portfolio in gold, which has recovered to 12-month highs this month.
Gold generally weakens when the global economy improves. But monetary policy is still extraordinarily loose for this stage of a recovery, which means there is a danger of inflation rising much faster than expected over the next few years. In any case, until tension eases North Korea seems likely to overshadow the economic backdrop as far as gold investors are concerned, says Martin Arnold of ETF Securities. It’s time for the yellow metal to shine.