The latest increase in tension between North Korea and the US over North Korea’s nuclear missile programme is a timely warning for investors to remain diversified, affirms a leading analyst.
The warning from Tom Elliott, International Investment Strategist at deVere Group, one of the world’s largest independent financial services organisations, comes as the tensions contributed to a rally in defensive assets on global financial markets this week.
This reminds us to remain diversified in our investing habits. We should also be aware of the risk of responding to geo-political shocks by selling assets: too often we find ourselves selling at the moment of highest fear, only to be out of the market as a rebound in stock market prices takes place as tensions wind down.
This week’s beneficiaries have been oil, the Swiss franc and the Japanese yen, and quality government bonds. Global stock markets fell. The VIX index of implied future volatility on the S+P 500 index (the so-called ‘fear index), jumped to a three-month high of over 15, and we saw growth-orientated stocks underperform their value counterparts across developed stock markets.
There are few better illustrations as to why a long term investor, keen to maximise returns while keeping portfolio volatility low, should hold core government bonds in their portfolio as part of a balanced portfolio.
Exposure to the Swiss franc and Japanese yen perhaps best comes through ownership of global stock and bond market funds, or through currency Liquidity funds.
A global stock market fund will have its fair share of value and growth companies, unlike -say- the FTSE 100 index which is predominately value-orientated with its bias towards energy, mining and financial, or the Japanese TOPIX which is growth-orientated with a predominance of consumer goods companies.
In all likelihood the North Korea problem will persist for years to come, with the US, and increasingly China, attempting to contain and restrain Kim Jong-un. He knows that any use of missiles – nuclear-tipped or not- against the US or one of its Asian allies, risks a retaliation that will lead to the end of his family’s rule of the country.
Therefore, there is a high probability that the current tension will ease off, and the recent flight into defensive stocks will reverse.
But do keep those defensive assets. It is not just North Korea that has the potential to surprise investors. Whether it is a credit crunch in China, policy error from the Fed, or fear of an over-valued US stock market, there are many reasons to maintain a balanced multi-asset portfolio that has exposure to defensive asset classes and currencies.