Crisis, what crisis? Why are markets holding up?
Kim Jong-un and Donald Trump's war of words made some fear the world is on the verge of chaos - but global stock markets have barely noticed. While the North Korean leader and American president have been busy calling each other "deranged" and threatening destruction, markets, in both the West and East, have continued their march upwards. The FTSE 100 index of British stocks is virtually unmoved since relations between the countries cooled after Mr Trump assumed office in January. Even in Japan, where test missiles have flown overhead, the market appears unconcerned, with the country's Nikkei 225 index up around 7pc since the start of the year. Why is the market so unruffled? How do professional money managers approach wars, natural disasters and freak events, and what should private investors do? Telegraph Money looked back at how markets reacted to historic shocks and spoke to the managers of billion pound global funds about how they protect against, and take advantage, of the unexpected. From the Crimea crisis to the Twin Tower In the past, markets have lost 5pc or 10pc as a crisis emerges, said Adrian Lowcock, of Architas, the fund group, but they are "surprisingly resilient and recover quickly". Defining a "crisis" is not straightforward. Some military conflicts, for instance, begin after months or years of growing tension. By the time war breaks out, institutions and businesses are expecting it and the impact on stock markets is minimal. This was the case in the Iraq war. In Britain the political process of sending troops there had been going on for some time. The FTSE 100 fell in the months before the start of the war in March 2003, and was down as much as 16.5pc just days before. But the index recovered quickly once it became clear the coalition would win. The FTSE entered a phase of almost continuous growth, peaking just before the full scale of the credit crisis became apparent in 2007. The 2001 attack on the World Trade Centre was an entirely different event. The FTSE fell 5pc as news broke. Wall Street closed following the attack and when it reopened British stocks fell further - the index was down 12pc 10 days after the event. The attack on the Twin Towers sent markets crashing, but they quickly recovered Credit: AP But markets quickly realised that the attack hadn't fundamentally changed the trading conditions of most American firms and the economy. By early October, all the FTSE's losses had been regained. Russia's annexation of Ukraine in March 2014 was treated in a similar way to the Iraq war. The FTSE fell by around 3pc in the weeks before the arrival of troops in the region but only fell a further -0.2pc in the week after the invasion itself. The impact of the 2011 tsunami on Japan, on the other hand, was sudden and long-felt. Around 20,000 people died, the country's Pacific coast was devastated, and the Fukushima nuclear reactor went into meltdown, the worst such disaster since the 1986 Chernobyl explosion. While leading British stocks only dropped 4.2pc before rebounding quickly, the Nikkei was down 17.5pc and didn't make up the lost ground for 18 months. Damage from the earthquake and tsunami is estimated at around £189bn and pushed Japan back into recession. While hardly a crisis when compared to these other events, last summer's referendum vote to leave the EU was certainly a shock to markets. As Telegraph Money reported at the time, the markets' initial over-reaction to the Brexit vote created opportunities for professional and DIY investors to buy stocks at bargain prices. The window of opportunity was not open long as investors went on a buying spree and realised the terms on which Britain would make its exit would not become clear for years. UK-focused financial groups and housebuilders suffered particularly badly. Lloyds Bank and house-builder Taylor Wimpey, for instance, hit lows in early July 2016 before recovering. They are now up 20pc and 40pc respectively since the Brexit vote. Research by Schroders reveals the incredible speed at which markets recover. Of the 20 biggest one-day falls in the FTSE All-Share since 1991, there were only two scenarios where total returns were below 50pc five years later. These were 1 September 2001 and 21 January 2008, the height of the financial crisis. How are fund managers treating North Korea? While markets have so far been calm over the threat posed to both local and global economies of a nuclear war, fund managers have starkly contrasting opinions. Jason Pidcock, manager of the £530m Jupiter Asian Income fund, played down the threat of conflict involving North Korea: "Kim Jong-un's married and part of a dynasty: you'd expect him to want to continue that. If he sent a missile he'd be dead in minutes, and he knows it." In the event of an attack, said Mr Pidcock, the most likely target would be Seoul, the South Korean capital. If that were to happen, the conflict would be over very quickly, he said, as South Korea's allies and Jong-un's enemies stepped in to retaliate. North Korea now has the ability to reach out and destroy your portfolio in a very direct way "Strangely, if there was a conventional attack on South Korea and that meant North Korea subsequently disappeared as a risk, the market could actually trade higher," he said. Chris Darbyshire, of Seven Investment Management, is far more cautious: "Trump's baiting is a new tactic in international relations and completely relies on Kim Jong-un's response being rational, and I worry - what if Jong-un thinks he can win? Trump is the risk and he is sitting in the centre of the largest bond, stock and currency markets owned by the world's investors. "People think this spat will just blow over but North Korea now has the ability to reach out and destroy your portfolio in a very direct way that Iraq, for instance, didn't." Mr Darbyshire, the firm's chief investment officer, said the fund group had moved to counteract the risk of markets falling. It had done this by buying "put options", a contract that allows investors to sell stocks or markets at a predetermined price, and has been buying gold. "We now have about 7pc of our portfolios in gold - the highest proportion it's ever been," he said. M&G Investments' Steven Andrew is another share picker who thinks the market is right to largely ignore the situation in North Korea. There has been growing tension between North Korea and the US after Donald Trump's election Credit: REUTERS He runs the £740m Episode Income Fund, which aims to seize the buying or selling opportunities created by "episodes" that push other investors into making emotional, rather than considered, responses. In the case of North Korea, markets had barely reacted because the outcome was "binary". He said: "It's either total devastation or nothing at all. Which means managers can't really price it in. That's the approach I think markets should take to most political events and crises, but it is not." How should investors view crises? Mr Lowcock of Architas said: "While each political crisis or event is unique it is hard to know what the short-term effects are on markets. But the longer term impact is clear. "Geopolitical events are largely ignored by markets longer term as their greater concern is the health of the economy and firms' profitability." But he advises buying during the crisis given the speed at which markets typically recover. Gold has been the ultimate "safe haven" asset for hundreds of years. Prices spiked after the Brexit vote and Mr Trump's election, for instance, as panicked investors piled in. There are various ways to hold gold, including buying bars and using specialist online dealers that hold gold on your behalf. More conventional investment is available through "exchange traded funds", which track prices using "derivative" contracts, or open-ended funds, such as the popular BlackRock Gold & General fund. firstname.lastname@example.org