Markets Live: Banks weigh on ASX

Here’s the AFR’s columnist Christopher Joye on North Korea and investing:

For years the spectre of military conflict in Asia has been a focus of this column and my own portfolios. While South Korean, Chinese, and Japanese companies are regular issuers into the Australian bond market, and feature in many fixed-income portfolios, I have avoided them like the plague because of the fat-tail geo-political hazards.

Back in 2013 I revealed that highly-regarded security strategist Hugh White believed there was a 1-in-10 chance the US and China could become engaged in outright war over the next 15 years.

The feedback from interviewing the heads of ASIO, the CIA, and the NSA was just as dour: the tyranny of distance that protected Australia during World Wars I and II could quickly become the tyranny of proximity as Western-Sino tensions drove the probability of global conflict to heights not observed since the Cold War.

So when the North Korean despot Kim Jong-un started lobbing intercontinental ballistic missiles (ICBMs) out across the region—powered by Ukrainian engines that catapulted the Hermit Kingdom’s ICMB program—I reached back out to leading thinkers in the field.

I’ve explained before the (limited) steps one can take to insulate portfolios from these catastrophic contingencies. The first involves not blindly diversifying overseas for the sake of it. I avoid Chinese, Japanese and South Korean securities (and any managers with these exposures). The monetary upside is simply not worth the radioactive downside.

Second, I prefer strategies that are allowed to go 100 per cent to cash and/or short. By doing so they can ameliorate risk by selling assets and/or hedging the possibility of future price declines.

Third, there is a role for investments that afford “positive skew” or explicit insurance against so-called “black swans”. This includes savings destinations of last resort, like bitcoin and gold, and long volatility or “bear” funds that rise when markets dive. BetaShares offers a variety of these protective products against both Australian and US equities.

At the end of the day, however, there is some non-diversifiable existential risk that afflicts all portfolios. If China or North Korea successfully fires nuclear ICBMs with 50 kiloton plus payloads into Sydney and Melbourne, we are all, frankly, screwed.

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