North Korea conflict creates unrest on equity markets

The escalation spiral in the North Korea conflict is intensifying further. US President Trump recently threatened a military conflict if North Korea refuses to relent. And the corresponding verbal response from North Korea was quick to come. At the same time, China has launched a major manoeuvre before the coast of North Korea. This was all prompted by a united response on the part of the UN to North Korea’s actions which nurtured hopes that the community of nations would now adopt a unified stance towards this small country. A further escalation of the conflict would most likely prove difficult to contain, and would probably have far-reaching consequences. The Asian region in particular – but not only – would be affected by this.

Financial markets, and equity markets in particular, have reacted to the latest political developments. For the first time in a long time, the world’s stock markets suffered significant price losses today. Until now, 2017 has been an exceptionally calm year on markets, as reflected both in the consistently low volatility of share prices as well as the level of maximum intraday draw-downs. Even after the latest price losses, the DAX has only corrected by six percent relative to its annual high. This is still a comparatively low value, given that the German leading index has corrected during the year by an average 18% since 1975 from the local high to the next low.

The time for profit taking on the equity market is clearly favourable. The reporting season in the USA has come to a very good end, and the reports still to be published in Europe are unlikely to offer any fundamentally new insights. Following the strong price development, virtually all equity markets in the industrialised nations – with the exception of the Euro Stoxx 50 – appear too dear at their current level. Moreover, in the USA a large part of the rally was attributable to only a few sectors (in particular the technology and financial stocks), and these are also likely to be more susceptible to corrections now.

A few weeks ago, we had already lowered the equity exposure in our DZ BANK portfolio and recommended a more cautious approach. Thanks to the good global economic development and the lack of investment alternatives, equities continue to offer potential in the medium term. For the moment, though, we expect equity markets to remain susceptible to fluctuations, as recently evidenced in the verbal clashes between the USA and North Korea. In the period after the reporting season, which is normally characterised by a dearth of news, investors are very unlikely to miss out on an upward spike on the equity market. A reduction in the equity allocation would therefore be altogether advisable. Before the general election, we see few worthwhile occasions for new exposures at the current price levels.

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