How investors can ferret out risks from US-China trade conflict and the Iran and North Korea crises for a prosperous Year of the Rat
- The smart investor will do well to loosen risk appetites for the first and final quarters, when trade war truce and US election results are likely to boost markets, but watch for heightened uncertainty in the second and third quarters from Iran and North Korea, and US electioneering
Consider the landscape. The issue of a potential trade war remains alive for US President Donald Trump’s re-election campaign under phase-two negotiations. This is a well from which Trump’s campaign will want to drink again and again in 2020.
But perspective and equanimity are needed. There is only a minute chance of a full confrontation between global military powers, and small regional armed conflicts typically have no lasting effect on economic fundamentals. Markets react but small conflicts tend to be isolated and short-lived. In the face of strong economic fundamentals, they actually turn out to be good buying opportunities.
By the following Friday, markets had recovered all losses from the knee-jerk reaction and were looking again for new highs. Years from now, an analyst looking at the week’s market data would be completely unaware that we came close to war.
Far from shrugging off Iran crisis, markets are rooted to the spot
In the new normal of unpredictable politicians, trying to forecast an escalation/de-escalation of geopolitical crisis is not only impossible, it is unprofitable and unadvisable. The best approach is scenario planning based on changing risk appetites and to adjust your risk budget for the year.
The second and third quarters are a good time for higher risk aversion. Iran and North Korea could make good on their threats and with Democrat and Republican national conventions (July and August) coming up, US electoral rhetoric could become acrimonious and divisive. The US administration may look to use a foreign threat as a rallying cry. Low volumes during the summer months can lead to overreaction on risk events.
The fourth quarter, which will see US election results, might see increased risk tolerance. A boost is likely in the form of higher confidence or a relief rally after months of uncertainty.
The Year of the Rat could be a barbell year, with investors likely to see higher risk-adjusted returns in the first and final quarters, while heightened uncertainty in the second and third quarters drives risk up and returns down. Not reacting to sensational news may be the best fortune to follow for a new and prosperous lunar year.
Olivier d’Assier is head of applied research for global financial intelligence and analytics firm Qontigo