Please note the disclaimer at the end of this Blog.
If a week is a long time in politics, then a year must seem like an eternity. Just ask Theresa May. A year ago she was riding high, holding hands with Donald Trump on the White House lawn. Full of confidence on her return, she called a snap election to cement her grip on power and, thereby, give Britain a strong hand in Brexit negotiations. Now she’s struggling even to hold on to her senior Ministers. Last week, in Korea, we witnessed more political hand-holding. North and South Koreans will be hoping that the good-will which followed the summit is longer-lasting than Mrs May’s majority. In a bizarre twist of fate, it could even lead to the man who boasted about his ‘bigger Nuclear Button’ being nominated for the Nobel Peace Prize. Certainly, if President Trump helps bring peace to the Korean Peninsula, a feat which has eluded 11 of his predecessors, it would allow him to leave office with a lasting legacy. Peace in Korea could therefore become his most prized objective and colour much of his foreign policy, including how he deals with the other Superpower with a dog in this fight, China.
Let’s rewind a year. As much of Asia enjoys a period of political stability, events on the Korean Peninsula threaten to disrupt regional harmony as North Korea intensifies its missile and nuclear test program. This is followed by the installation of the US THAAD shield in the South. China does not appreciate the ratcheting up of military tension and imposes sanctions on South Korea. Donald Trump joins the fray, engaging in the kind of rhetoric which appears designed to provoke the ‘Little Rocket Man’ into ill-advised military action. The President simultaneously unleashes the opening salvos of his protectionist campaign against Beijing.
However, with the dawning of the New Year 2018, came a notable reduction in tension with the PyeongChang Olympics followed two months later by the historic image of Kim Jong-un and Moon Jae-in skipping, hand-in-hand, over the low wall which separates the two belligerents.
How might the events of last week influence the region? Firstly, they may not. The euphoria may die away like so many false dawns since 1953, though early signs are certainly promising. Second, if President Trump wants to keep the peace train rolling, he’ll need China to help keep its wheels oiled. This may encourage him to be a little more conciliatory in his dealing with Beijing and encourage a little more jaw-jaw than war-war, when dealing with the thorny issue of trade tariffs. This is a potential big win for all of Asia (and the rest of the world). Third, while Asian markets have led the world since the re-launch of the North Korean missile programme on 12 February 2017, it is quite possible that they would have performed even better in a benign geo-political environment. It does not necessarily follow that a peace treaty will lead to resumed outperformance but, other things being equal, peace is unlikely to be negative for the region. Fourth, the effect on South Korea will depend on what agreement is reached. Harmony and co-operation should be positive but reunification could come at a very high cost for the South, certainly in anything other than the long-term. German reunification is estimated to have cost €2 trillion, so far.
Whilst the thawing of relations on the Peninsula is politically good news for Korea, it is vital not to overestimate the potential market impact. Just as investors are wise to keep their cool when faced with seemingly negative political events, it often pays not to be over exuberant when news appears positive. The key, as ever, is to focus on good quality, innovative businesses which, in the case of Asia, can be found in high growth as well as mature economies and are diversified by country, sector and style. These opportunities can be found in the region’s great economic powers (China, Japan, India, South Korea and Indonesia) as well as in smaller markets or emergent companies where valuations are often lower than those more on the beaten-track, providing opportunities for stock pickers.
While the chance of Donald Trump becoming the second consecutive inhabitant of the Oval Office to receive the Nobel Peace Prize is still a long-shot, investing in Asia’s growth prospects appears less speculative, for patient investors. Synchronised global growth is benefitting the region where corporate earnings are continuing to improve as faster growth boosts demand for Asian products and services. Inflation, whilst higher than in recent years, remains low by historic standards. Markets have been more volatile this year as some central banks commence the withdrawal of monetary stimulus. However, equities (including those in Asia and Japan) offer attractive opportunities for patient investors seeking exposure to improving global growth prospects.
James Hart, Investment Director of Witan Investment Services.
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