UBS House View Daily

Thought of the day

04.09 - North Korean nuclear test shakes markets

Equities fell and safe havens like the yen and gold rose after North Korea announced on 3 September its first successful hydrogen bomb test, which was estimated to have been about 10 times more powerful than previous nuclear test detonations. The KOSPI index dropped by 1.2% and the Nikkei 225 fell by 0.9%. While we expect periodic flare-ups in tensions over North Korea to continue, we don’t believe investors should exit risk assets:

  • Our base case remains for a diplomatic solution. The US is talking tough while also pursuing diplomatic options. US Defense Secretary James Mattis said the US has “many military options” and President Donald Trump criticized South Korea for its “talk of appeasement.” Trump also said the US is considering “stopping all trade with any country doing business with North Korea,” and Treasury Secretary Steven Mnuchin confirmed a sanctions package is being drafted.
  • Negative market impact is likely to be limited. After the past five nuclear tests by North Korea, equities in Asia ex-Japan lost just 0.6% within seven days of the tests.
  • Investors who seek safety in cash may miss out on rising equity markets at a time of synchronized global growth. The economies of all 45 countries tracked by the OECD are set to expand this year, with nearly three-quarters of them experiencing faster growth than last year.

So while we continue to monitor developments in North Korea closely, we maintain our preference for risk assets within a diversified global portfolio. We are overweight global equities.

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