Investing in Asia is Chock Full of Risk

| October 15, 2017

When you invest, you are trying to predict the future. You weigh what might be possible against what could happen, then bet on the outcome most favorable to your views. Thus, the highly prized attribute when choosing an investment is an outlook toward stability. Although there are never any guarantees when it comes to investments, knowing that the people in charge are going to stay in charge for a while and that any problems are being worked out in a thoughtful manner, make it easier for you to lay your money on the table.

Unfortunately, that’s the exact opposite of what’s going on right now in the Asian markets. Threats of war, predictions of economic downturns, and general political turmoil are just some of the issues besetting the region. As you might imagine, that’s left the markets with a large measure of uncertainty. Nervous investors generally make for cautious investors. After all, no one wants to invest in a business that’s on fire. That’s why gold prices, the Japanese yen, and US Treasuries have recently seen activity spikes. These safe havens are far more predictable. At close-of-trade on August 25th, Korean stocks were up over 16 percent for the year, while the Korean won has appreciated against the U.S. dollar, becoming Asia’s top performing currency despite higher US interest rates and the threat from its neighbor.

NORTH KOREA AND ITS THREATS

The biggest issue in the region right now is North Korea. Although that nation is not a big economic player, their leader Kim Jong-Un is consistently testing nuclear weapons and long-range missiles. These threats have conjured some bad vibes and not just a little anger. Despite efforts to rein in the North’s nuclear ambitions, they continue their aggressive stance. That, in turn, has brought a response from the United States, whose alliances and interests are threatened immediately by the North’s goal of placing a nuclear warhead on the tip of an intercontinental ballistic missile (ICBM). Don’t forget, there was no peace agreement with North Korea following the Korean War (or the Fatherland Liberation War, as the North calls it). Instead, we have what’s known as an armistice, which is merely an understanding to stop fighting.

Severe economic sanctions are squeezing the North, and its largest customer, China, has been putting some pressure on the regime in hopes of heading off problems, like a flood of refugees storming across their borders. But it’s not the North Korean rulers who suffer from sanctions. The leaders believe they have but one deterrent for regime change – nuclear weapons. It’s an argument that’s hard to refute, given that they have but one ally in the region.

CHINA HAS ITS OWN PROBLEMS

While a potential war with North Korea has depressed the region, China is taking actions that make it seem that the country is heading toward a cooling economy. And with good reason – industrial output has slowed and an overheated real estate market may be heading down.  A major indicator is that the government is cracking down on capital leaving the country for outside projects by putting restrictions on foreign investments by some of its biggest corporations. The official reasons cited are fears that there’s too much risky debt on the table.

The real reason may be that lawmakers think investments in domestic needs are more important. There’s a big push for President Xi Jinping’s “Road and Belt” program, an infrastructure initiative to build rails and roads to cities in Eastern Europe and Asia. The jobs created by those infrastructure initiatives would go a long way toward easing some of the pain in the country’s economy, something an investment in London hotels can’t do. The International Monetary Fund (IMF) has sent mixed signals on its China outlook. While the IMF believes China’s economy will grow an average of 6.4 percent each year for the next five years (representing a slight increase), it also worries about the country’s public and private debt load. That could mean trouble if there’s a sudden shock to the economy – a war, trading difficulties, or other unforeseen circumstances.

While the IMF is somewhat bullish, not every economist agrees with its forecast. Some see a hard landing for China’s economy in 2018. That could mean growth slows to two percent a year, a major drop, and one that will ripple throughout the region. Real estate, construction, and bonds will suffer the greatest hits.

JAPAN LOOKS TO INNOVATION

And what of Japan?  Its aging population and somewhat rigid economic system have been anemic for a long time following the boom years of the 1980s.  Growth is still somewhat slow, with year-to-date stock prices up about two percent.  The good news is that stagnation is leading Japan to seek new avenues to expand. One such ticket is cryptocurrency. The country is one of the leading proponents of Bitcoin, having made the digital currency legal tender for debts just a few months ago. Now many businesses are accepting it, and the government is determining which companies can run cryptocurrency exchanges; dozens have applied to do so.  While that innovation can spur new growth, keep in mind that Japan was also home to Mt. Gox, once the world’s largest cryptocurrency exchange – until, that is, it was hacked and hundreds of millions in bitcoin vanished.

Of course, there’s also an upside to some of the gloom and doom that can confront the Asia-Pacific region. Guam is experiencing a bit of a tourism boom since North Korea threatened to fire missiles at it. While the North Koreans have since pulled back, the resulting publicity over a few weeks in August was just the thing to get people to check out the US territory. And while the economy in the north of the Korean peninsula chokes, tech-heavy South Korea is doing quite well in international markets. Shares of South Korean companies have been one of the best performers globally for most of the year, although more sabre-rattling by its Northern cousin could cause investors to think twice.

The fall is typically a time when US stock markets have seen some strange occurrences. In a globally connected world, any major deviations could have a spillover effect to other regions. For now, the status quo of no wars and continued financial maneuvering by China makes the Asia-Pacific situation volatile. As the Chinese say, may you live in interesting times. Of course – that’s considered a curse.