Rising tensions between the United States and North Korea brought a wave of falling stock prices recently as worried investors moved money out of equities and into the perceived safety of gold, Swiss currency and similar products. At one point, this change of investment strategy cut $1 trillion from the value of global stock markets.
For some perspective on these concerns, VOA's Jim Randle spoke with IHS Markit's Rajiv Biswas in Singapore. IHS Markit employs thousands of financial, data, and other experts who track economic issues worldwide. Biswas is the company's chief economist for APEC. His comments here were edited for brevity and clarity.
Randle: Why do rising nuclear tensions prompt falling stock prices?
Biswas: In the nightmare, but still low-probability scenario in which North Korea were to succeed in using nuclear weapons against South Korea, the devastation of the Korean peninsula would be catastrophic. Global financial markets would also suffer a tremendous shock in the short term, with massive flight to safe haven assets such as gold, USD and CHF. The humanitarian crisis and economic reconstruction of the Korean peninsula after such a nuclear conflict would require large-scale international cooperation led by China, the U.S. and EU, and would likely take over a decade to rebuild the economy.
Even a conventional war would result in considerable destruction to the South Korean economy... and likely result in tremendous casualties in both South and North Korea. The economic consequences ... would likely be horrific, and ... also result in a temporary shock to global financial markets. The greatest vulnerability would be for the South Korean financial markets and Korean won. Other regional East Asian financial markets would also be vulnerable, particularly Japanese financial markets, with risks of disruption to Northeast Asian regional trade and investment flows and manufacturing supply chains.
The South Korean economy accounts for around 1.9% of world GDP, and a severe drop in South Korean GDP ... would have negative effects on key trade partners. Japan is also concerned that North Korea could launch missiles at Japanese targets, particularly... U.S. military bases in Japan. The reconstruction and rebuilding of South Korea’s economy after a major conflict would likely take many years, with significant international support needed to help South Korea with the reconstruction task.
Randle: Why do worried investors seek gold, oil, and Swiss currency?
Biswas: If international investors fear that the probability of a military conflict on the Korean peninsula is rising, they will likely reduce their exposure to global growth assets, such as Asian equities and Asian currencies... as they fear that the world economy and Asian countries near North Korea could suffer economic dislocation and trade disruption in the event of a conflict.
In times of geopolitical crisis, the traditional safe haven assets for global investors are gold, U.S. dollars, U.S. Treasuries and Swiss francs, as these are very stable, internationally traded liquid assets. These safe haven assets tend to rise in value when investors fear that geopolitical crises could weaken global growth prospects as investors switch their investments out of global equities and emerging market currencies into the safe haven assets.
Randle: Are U.S. stocks ripe for a fall?
Biswas: While geopolitical risks due to escalating tensions on the Korean peninsula have been reflected in some modest declines in some international equity markets in recent days, there has been many previous episodes of rising military tensions on the Korean peninsula. Global investors have previously shown considerable resilience to earlier bouts of geopolitical tensions on the Korean peninsula, such as North Korea’s sinking of the South Korean navy warship Cheonan and the North Korean artillery shelling of South Korea’s Yeonpyeong Island in 2010
During 2017 to date, the U.S. equity market has been driven by a wide range of positive factors, including sustained U.S. economic growth momentum, planned corporate tax cuts by the Trump administration, moderate inflation pressures and positive U.S. corporate earnings growth prospects, so geopolitical risks from North Korea are not the only factor impacting on the U.S. equity market outlook.
Randle: Even if actual hostilities don’t break out, could these nuke worries be enough, in theory, to spark a sharp drop in financial markets?
Biswas: "The canary in the coal mine that will signal rising international financial markets' risk aversion [worry] is likely to be South Korean asset classes. The South Korean stock market and the Korean won are likely to be most vulnerable to declines in response to rising international investor concerns that military tensions are escalating further. One measure of financial risk are the South Korean sovereign credit default swap (CDS) spreads, with IHS Markit data indicating that South Korean CDS spreads widened in July following North Korea’s ICBM tests, and spiked up further this week following North Korea’s threat to attack Guam. So far, these widening spreads only signal a moderate increase in financial markets perceptions of geopolitical risks on the Korean peninsula, but a sharp further widening of the South Korean sovereign CDS spread would be a clear signal of rising investor anxiety.”