Portfolio Protected Against the Tensions in AsiaIt’s clear that the global economy has been in a weak state for an extended period of time. However, investor confidence has rebounded over the past few months in anticipation that the global economy can regain past momentum.
Numerous problems remain across various sectors in the global economy, and they are preventing an increase in growth. Yet one risk that could severely impact investor confidence is the possibility of war in Asia.
Many people quickly dismiss the idea that yet another war could ignite. Investor confidence clearly doesn’t see this as a probability, considering how high the stock market is. However, as a prudent investor, one must evaluate every potentiality.
There are two areas of concern: North and South Korea, and China and Japan.
The situation between North and South Korea is quickly deteriorating. This past Monday, both nations staged war games, while increasing threats. South Korea has troops on high alert, while North Korea claims it has nullified the armistice.
North Korea is increasing its aggressive stance in the hopes that the world will back down and cave in to its demands. The nation has repeatedly warned that it will use nuclear weapons.
Tensions are also increasing between Japan and China, the catalyst being three tiny islands in the East China Sea.
Both nations claim territorial rights to the islands, with each nation increasing its aggressive stance. On January 10, two Japanese F-15s intercepted a Chinese plane flying in the vicinity of the islands, an action to which China retaliated by sending its own fighter jets.
Japan is now considering firing warning shots if any further Chinese aircraft encroach upon its territory. This would be the first instance of actual combat between the nations. (Source: “China and Japan square up: The drums of war,” The Economist, January 19, 2013, last accessed March 11, 2013.)
With the global economy still weak, the last thing the world needs is senseless violence and a disruption in trade. While investor confidence has increased, as seen by the rise in the stock markets, it’s still quite fragile.
The global economy is growing increasingly dependent on trade between nations. Any disruptions will not only hurt the global economy, but they will also have a severe impact on investor confidence.
With the European continent continuing to struggle financially, the global economy cannot take a substantial hit from a military escalation—especially between China and Japan, as this would create issues for the U.S.
The U.S. continues to have agreements in which it supports Japan. The amount of trade in the global economy that would be affected if any military escalation were to occur would be massive. At this point, no one can accurately quantify the hit to investor confidence if this were to occur; but make no mistake, it would be severe.
Assuming the worst, if military escalation were to occur, one possible scenario would be that investor confidence in stocks would drop, leading to a sell-off in equities. There is the possibility that investor confidence in gold would increase, using the yellow metal as a safe haven away from both equities and various currencies.
If the U.S. were to get involved, considering the massive level of debt currently on the country’s books and the deterioration of the global economy, investor confidence in the U.S. dollar would probably decline. This would also positively influence investor confidence for gold.
Are any of these scenarios likely? Probably not, but one needs to prepare for the worst. With investor confidence quite fragile, the global economy remaining weak, and the stock markets at or near their all-time highs, any such catalyst could deliver a severe blow to many portfolios; and this could drive investor confidence in safe haven assets, such as gold.
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