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Managers play it cool as North Korea war of words heats up

Managers play it cool as North Korea war of words heats up

Asia Pacific equity managers are not making drastic changes to portfolios, despite mounting tensions between the US and North Korea.

US President Donald Trump warned he was prepared to ‘totally destroy’ North Korea if this course of action was necessary to defend America or its allies.

He told the United Nations that North Korean dictator, Kim Jong-un, who has built up a nuclear arsenal, was on a suicide mission for himself and his regime.

Business as usual

The inflamed situation has had relatively little effect on stock markets, according to Flavia Cheong, head of Asia Pacific equities at Aberdeen Standard Investments.

‘The reaction of equity markets in Asia has been muted,’ she said. ‘The dollar has weakened, but this is only partly attributable to events on the Korean peninsula.’

Cheong says this means either financial markets are a poor gauge of geopolitical risk or investors are not concerned and see it as the latest iteration of the last Cold War. Although she has not made adjustments to her portfolio, this is mainly due to having always been overweight Korea versus the regional benchmark for corporate governance reasons.

‘We can’t be complacent,’ she warned. ‘Many of us remember the global financial crisis a decade ago, so it would be foolhardy to dismiss any scenario, however unlikely.’

Looking South

Ed Wiltshire, Asia Pacific equities fund manager at Aviva Investors, has used the increased volatility to review current positions. ‘Given the rally Asian markets have enjoyed since the start of the year, profit-taking among the more liquid stocks has made sense,’ he said. ‘Consequently, relative overweight positions in the South Korean market have been reduced.’

However, he points out South Koreans are best placed to take a view of the situation and they appear relatively sanguine. ‘If the situation does escalate into military action, the South Korean market will take a big hit,’ he said.

‘But it’s difficult to see any such scenario that wouldn’t impact all markets in the region, as well as the US and China.’

Tech kings

Mike Kerley, director of Pan Asian equities at Janus Henderson, has not changed his portfolio. ‘You’ve got geopolitical on one side and economic strength on the other,’ he said. ‘This means it’s very difficult to make any forecasts.’

Kerley sees South Korea as an attractive market. ‘It’s been a pretty rosy story for earnings across Asia but South Korea has led the way,’ he said. ‘The market is led by Samsung but is broadening out into financials, industrials and chemicals.’

He believes there are plenty of opportunities. ‘You have well-known brands such as LG and Hyundai, as well as some big companies in steel, petro-chemicals and cosmetics,’ he said. ‘It’s a technology focused, export-oriented and fairly mature economy.’

Impossible to predict

Kerley likes oil refining, citing SK Innovation as a particularly strong company. ‘Refining margins are going to be quite wide going forward due to underinvestment in mining capacity.’

He remains optimistic about the outlook for South Korea, particularly due to regulatory changes taking place.

‘Korea has always been the cheapest market in Asia mainly because, similarly to Japan, it’s never paid much attention to minority shareholder interests,’ he said. ‘However, there’s reason to believe this is changing as corporate governance is improving slowly.’

On the political front, he points out that, short of going into cash, there’s not much you can do to hide away from the risk of war between the US and North Korea. ‘Investing ahead of geopolitical risk is incredibly difficult, especially when the two main protagonists are so unpredictable,’ he said.

‘We’ve had risks in the past but not involving characters such as Donald Trump and Kim Jong-un,’ he added. ‘You couldn’t paint a worse picture.’

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