Market Commentary – 09th August 2017
Is Fire and Fury necessary?
Today morning we woke up to more war of words between the United States and North Korea, however this time North Korea has given a target and has said it is considering striking the US bomber base on the Pacific island of Guam, using medium-to-long-range missiles. This makes the threat more concerning in retaliation after US President Donald Trump threatened “fire and fury like the world has never seen”, responding to claims the rogue state has finally develop nuclear rockets, which it has been testing over the past couple of months.
The Trump administration must decide what it can and cannot live with, and what to do about a situation that is rapidly moving from bad to worse. To his credit, even as a candidate, President Trump placed the North Korea issue at or near the top of his list of national security concerns. And he has consistently called on China, North Korea’s leading trading partner, to do more to rein in its client state. On the other hand, Mr Trump has underestimated the risk and complexity surrounding the North Korea problem. While he vowed early in his tenure that he would solve it one way or another, he ignored the reality that there are no good policy options available. Any use of force immediately places hundreds of thousands of South Koreans and Japanese citizens at risk. North Korea will almost certainly respond to a pre-emptive attack.
What if something does happen?
With an attack potentially imminent, what does this mean for markets? With just an exchange of words, the news prompted investors to seek havens such as gold and the Japanese Yen with indices lower from highs they achieved throughout this week. Please note that at this stage that most of these threats are just “political noise” which is disrupting the markets and it is stipulated that the sell-off caused by geopolitical tensions on North Korea may as well be short-lived if both Trump and Kim Jong Un keep making feints against each other and neither takes military action. However, we cannot second guess this “political noise” and such threats must be taken seriously with concerns if something was to happen.
It is without a doubt that this is a catastrophe, and we must factor in a potential attack which is becoming more likely given the temperament of both leaders. If these tensions escalate into something more serious other than words, we will immediately make the necessary changes in our portfolios and adjust them so they are least affected by the geopolitical chaos. We will start by selling down our long equity positions in the portfolios and will hold cash until the issue is resettled and then we will reinvest the proceeds once we gain some clarity over what’s happening. We will also place capital protection ahead of tax planning efficiency which means that clients with General Investment Accounts (GIA’s) could suffer a capital gains tax liability on any untaxed profits which exceed their available capital gains tax allowance. Considering the imminent risks, this is generally a small price to pay for peace of mind of capital preservation. It’s worth highlighting that the transition to cash will not have any negative tax implications for assets held in Individual Savers Accounts (ISAs), Offshore Bonds and Pensions.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track strengthen to record highs. In the US, the DOW Jones reached record highs over 22,100 and the S&P 500 also hitting record highs. Also in the UK, the FTSE 100 reached new highs due to a devalued pound. European markets also performed well followed by strong PMI data from July and growing demand for European goods and services. In Asia, markets have been relatively flat and in particular to the Chinese markets, China’s export and imports grew by less than expected in July, ending a run of strong numbers that had boosted optimism about global growth. Over the next week, if the geopolitical risks escalate, we will see these indices slowdown from record high.
With strong earnings boosting indices recently, over the past week, our portfolios have benefited, and in most cases beating their benchmark. However, this upwards trend has been halted today and the markets have been shocked by the geopolitical tensions between the US and North Korea. Like we said above, this could just be another round of fire between the two leaders and “political noise”, however if this persists, it will feed into the markets. We will keep a close eye on the issue at hand and will take necessary action as and when needed to ensure your capital is not affected.
This Day in History
On this day in 2012, Usain Bolt became the first person to win the 100m and 200m sprint back to back Olympics. Usain Bolt, is a Jamaican sprinter and currently the fastest human in the world. He also holds the world record as a part of the 4 × 100 meters relay. He is the reigning Olympic champion in these three events. Because of his unprecedented dominance and achievements in sprint competition, he is widely considered to be the greatest sprinter of all time.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager