We currently have two very topical issues to consider when assessing market risk. These are worthy of immediate analysis and consideration as many investors come back from the beach and consider their tactical asset allocation for the rest of the year.
Should we be really worried about North Korea and where are we with Brexit? 
North Korea
One possession recurrent in all individuals who seek or assume power and then strive to advertise it is their sizeable ego.
As with all huge egos, when they encounter another, there are usually fireworks. In the business world this usually manifests itself in a boardroom struggle and someone leaves. Clearly, in the global leader environment, these spats usually occur between the democratically-elected leaders (the good) and the unelected leaders (the bad) and this is fed to us by the media in this way and sensationalised to get the scariest scenario.
Whether democracy always delivers good leaders is a moot point, but what they can’t do is operate in a unilateral dictatorial way without opposition outrage and ridicule all over the media, as we have encountered with Donald Trump.
We all know about the ambitions of Kim Jong-un and how he obtained power at his tender age. It should come as no surprise that he has adopted the same controversial strategies of his father.
However, what we should gain solace from is that this appears to be a war of words; posturing and deliberate actions designed to humiliate the US and its allies.
His strategy will be to raise the fear bar as high as possible and then engage in talks to extract the maximum economic concessions whilst complying with whatever controls the UN wants to implement on a nuclear capable North Korea.
The mind-set being illustrated is a complete defiance of the assumed right that the US (and by default the UN) considers it has to determine what sovereign actions North Korea should be allowed to undertake. Any dictator by definition, requires absolute control, usually through fear, and so when some external power comes along and decrees ‘Thou shalt not….’ they are never going to accept it.
Kim Jong-un knows that Saddam Hussein played this game which ended in his WMD [weapons of mass destruction] bluff being called. ’Overwhelming shock and awe’ followed and we live with the aftermath today. He also knows that this will not be repeated and certainly not whilst China stands by its warranty to defend North Korea if a pre-emptive strike should occur.
He is very unlikely to launch a nuclear missile anywhere, but he will create the impression as much as he can that he has the capability. And this is probably what he has just successfully done. Nobody knows exactly what his capability is, just like Saddam Hussein, but the latter’s removal created the mess we now have in the Middle East and spawned the creation of ISIS.
As there is no religious angle involved in North Korea, the main obstacle to military action is China and their objection to the expansion of the West on their doorstep, as well as US trepidation with China. This is what also drove the actions of Putin in Ukraine and Assad in Syria, again exploiting the perception that the US (and NATO) doesn’t have the stomach for another invasion or to antagonise Russia or China. So, the war of words is likely to continue with the military might of the US looking impotent as another military dictator humiliates which ever US president has the privilege.
Of course what would be genuinely scary is if there was a radicalised religious motive behind the nuclear capability but thankfully, this is not today’s scenario.
So, in summary, whilst the situation is alarming, the markets are remaining calm, taking the view that no-one is actually likely to launch anything specifically with the intention to kill huge numbers of innocent people.
Of course, this also assumes Kim Jong-un isn’t a madman. Yet, his actions are very deliberately thought out and he is testing the red lines to the limit – hardly actions of an insane person. The best outcome would be that at some point, Russia or China can act as peace-broker, most likely Putin as that would polish his ego considerably having been quietly observing of late. What we wouldn’t advocate is any form of panic into cash.
Over the years, these threats have come and gone, the world moves on and companies continue to prosper – that is the important bottom line. Whether it be Al Qaeda, ISIS or Kim Jong-un.
Brexit update
The summer is over and UK political conference season beckons with more egos on display. I defend my tone of cynicism as being aligned with much of the investment community who are finding global politics extremely unhelpful when determining tactical asset allocation in 2017. This week sees the second reading of the so-called Brexit Bill which transfers existing EU legislation onto the UK statute book so that we don’t grind to a halt on 31 March 2019.
Theresa May now faces the realistic prospect of losing this vote or at least having to put in place significant amendments which result in a much softer Brexit. Welcome to the world of US politics where we have a figurehead leader with limited power and a disconnect with the realities of that.
The media are having fun with trying to report rifts between Michael Barnier and David Davis based on body language and soundbites. Quite where we are with regard to secret Brexit deals from Theresa May and the level of friction within the Brussels negotiating room, we can only guess. The main impact is ongoing uncertainty which is showing up in sterling weakness.
Since 21 April, sterling has weakened by almost 10 per cent against the euro but by only 2.5 per cent against the US dollar as it has suffered from Trump’s lack of delivery. Interest rate policy is mixed up in here as well and that ebbs and flows by the week. Current bets are off regarding hawkish activity and that will serve to support equity markets.
So, lots to think about as we return to our desks. However, whilst the central bank moral hazard remains and any softer economic data delivers dovish comments from central bankers, any volatility induced weakness will most likely be short-lived if September and October provide some seasonal opportunity. For now, the bears have little to rejoice about and are having to remain very patient.
Guy Stephens is technical investment director at Rowan Dartington. All views are his own and should not be taken as investment advice.