• Markets always struggle to price geopolitical risk
  • Trump’s administration has led to policy confusion
  • Very few of the key actors want a destabilised North Korea

Anthony Rayner, manager of Miton’s multi-asset fund range comments:

“There has been a lot of noise, provocations, threats and serious flexing of military muscle between the US and North Korea. But, beyond the headlines zooming in on “two madmen with nukes”, what do we know?

“Geopolitics is always complex, as it’s essentially horse-trading and brinkmanship on a global scale, but there is an additional layer of complexity here. Many of the key actors are relatively inexperienced, which is testing key loyalties (between the US and South Korea, and between China and North Korea) and potentially establishing new alliances, but also probably exacerbating the crisis.

“Donald Trump is relatively new to geopolitics, the South Korean president was elected in May of this year and the North Korean president, who came to power in 2011, is still only 33 years old. On the other hand, the Chinese president came to power in 2013 and stands out as much more experienced and statesman-like, though he is somewhat constrained at the moment, ahead of the 19th National Party Congress in October.

“It’s difficult to sketch out what might happen next. Trump is non-conventional, with his supporters suggesting his comments are ‘calculated madness’, and his detractors suggesting they are less calculated and more madness. Either way, it has led to policy confusion, and not just from a North Korean perspective.


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“The US has struggled to establish itself as a credible military threat, despite, or maybe because of, threats of “fire and fury”, and stating that they’re “locked and loaded”. Indeed, this level of diplomacy seems to be exhausted. That said, it’s not as binary as the status quo or war, which is encouraging, as the status quo option seems less and less likely.

“There are other creative, face-saving, diplomatic options, such as more missile defence systems or more sanctions, including the drastic option of cutting off oil supplies, but the effect of these might be too slow. There are also more left-field options like a China-engineered regime change in North Korea or a unification of the north and south. Certainly China could be the wild card, and not necessarily for bad.

“Our base case is for a second Korean war to be avoided, though clearly some form of military action seems more probable now than a few years ago, and with military exercises increasing, there is the threat of accidentally triggering a war, as well as intentionally. What’s clear is that very few of the key actors want a destabilised North Korea.

“Importantly for investors, these developments have proved to be market relevant. Markets always struggle to price geopolitical risk, though over recent years central bank liquidity has acted to dampen all risks, including geopolitical.

“So far, North Korean actions have led to periodic gains for safe haven assets like gold and the Japanese yen, and there’s evidence of South Korean equities and the Korean won hurting. However, there is little evidence of a sustained impact in equity markets further afield. Markets are generally fairly resilient and North Korea is unlikely to derail this extended bull market.

“In the meantime, we are looking to manage risk, rather than speculate. Part of this is ensuring our investments are diverse and liquid enough to allow flexibility if our base case is challenged, in what might prove to be a fast changing environment.”