Before we get too concerned about North Korea, remember Iraq?
There are definitely rising tensions between North Korea, China and the United States and of course lets not forget Syria, Russia and the United States, not to mention we still have ISIS to contend with. Far better informed sources than us will be making the calls on what happens with these conflicts and the humanitarian impacts as demonstrated by the Syrian Refugee crisis should never be discounted. World conflicts, unfortunately, are nothing new and can sometimes be about ‘Sabre Rattling’ or a positioning statement.
The concern, and no it is not a selfish one, for many of our clients is what does this mean for me and my savings?
The media speculation about ‘NUCLEAR WAR’ does drag us back to the 50’s and 60’s and the spectre of the Nuclear Winter….makes great headlines but let’s not pretend North Korea is a Nuclear power.
Additionally North Korea is looking pretty lonely. We know that China has massed troops on the North Korean border and the US aircraft carrier strike group, led by the USS Carl Vinson is now heading to a position off the coast of South Korea (the media may have jumped the gun on when it is going to get there but it is heading there now). The USS Carl Vinson is joined by an escort of a guided missile cruiser and two destroyers. The Navy Seal Team 6 (Bin Laden’s downfall) may also happen to be visiting South Korea and there is also speculation that the US has submarines in the area.
No one is arguing Kim Jong Un isn’t delusional enough to think he can tell the world what to do, but…. this is a fight he cant even begin. His missiles are not in the same century as the US and China – while dangerous, arguably he has the equivalent of a machine gun versus a missile launcher. The staggering power of that Nimitiz class aircraft carrier has been demonstrated through the Iraq crisis’ and Mr Trump has shown (through the Syrian and ISIS bombings) that he has a very different approach to his recent predecessors.
The US is asking the Chinese to put a much tighter leash on North Korea using trade sanctions on coal, and from reports during the recent Palm Beach meetings with Mr Xi, he appears to be making diplomatic headway.
So, let’s look at a little recent history…
The liberation of Kuwait back in January of 1991 (after Iraq invaded Kuwait in 1990) lasted from 17 January to 28 Feb. Markets took a big hit in the early part of the conflict and then recovered fairly quickly.
The subsequent Kuwait/Iraq war in 2003 (20 March to 1 May) and occupation had far more long term impacts however the investment markets for that period barely wobbled.
I think it can be argued that the modern investor has a fairly short memory so any escalation of the North Korean conflict will have a negative impact on markets, albeit probably briefly.
Should I have other concerns?
We would argue that we need to be more concerned with the recent strength of the investment markets, and that is what we have been managing over the recent months post the Presidential election.
The US has a sound case for its growth though we believe a lot of the potential good news is factored in. Australia, on the other hand, while benefiting from a wave of investment optimism, does not have the same fundamentals driving it.
Fractured federal governments, ineffective state governments, increasing public debt being driven by welfare and public service employment versus investment and the current property bubble all give us far more concerns than overseas conflicts.
We met with Magellan (International), Perpetual, Macquarie and Bennelong over the last three weeks to discuss the current investment environment and their positioning. Internationally, Magellan is not uncomfortable with US valuations but can see more upside in Europe (though they are waiting on a few election results). They are still holding more cash than usual as they expect some opportunities due to volatility. Locally, Perpetual’s Vince Pezullo is fairly negative on the big end of the Australian Market though positive on resource valuations. He has been holding extra cash since December and is unlikely to change this position until he sees some realistic valuations in the market. Macquarie’s Blake Edwards is of a similar mindset and has been finding value outside of the top twenty.
All agree that interest rates are unlikely to soften and can rise reasonably sharply over the next two years, partly due to inflationary pressures (food, medical and energy costs) but they will be more dependent on what happens to US rates. Rises in the US increase the cost of funding debt here in Australia, with the flow on effect being increases passed through to the consumer.
Property prices, especially in Melbourne and Sydney, are undoubtedly running hot and oversupply of units in those areas could lead to a correction. Brisbane and the Gold Coast have seen stronger growth recently but not to the same extent as our southern neighbours. Withdrawal of Chinese investment could be a trigger but oversupply is the key driver to be aware of.
So what do you need to do?
We have already taken reasonably defensive positions through our underlying investment managers and through them you are holding more cash than you would normally. This means that if there is a correction, we will have the opportunity to take advantage of cheaper share prices. Our portfolios are deliberately positioned to reduce the impacts of negative markets while still staying exposed to most of the upside. We describe the design as having some built in shock absorbers.
Points to note:
Dividend forecasts still look sustainable and are substantially stronger than cash rates so the volatility of the underlying share price should have no short term effects on income.
We generally do not recommend totally stepping away from the markets as you can miss an ongoing bull market despite rational investors believing it should stop. If, however, you would like to decrease your exposure to the markets by more than what has already been built into your investments then please talk to us. We want you to sleep easily at night and a measured sell down might be the right position for you in the short term?
If you are happy to live with some volatility, you are well positioned to manage the existing and forecast environment.
The information contained in this document is of a general nature only and does not take into account your particular objectives, financial situation or needs. Accordingly the information should not be used, relied upon or treated as a substitute for specific financial advice. While all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly Australian Advice Network, Guide Financial or Centrepoint Lending Solutions shall not be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.