UBS House View Daily

Thought of the day

29.08 - Equities shrug off North Korea missile test

North Korea launched a missile directly over Japan on 29 August, sparking a sell-off in risk assets across Asia. Safe havens like the yen and gold rose, while South Korean stocks declined as much as 1.6% before closing down just 0.23%.

But this risk event falls in line with our expectations for short-lived spikes in North Korea-related volatility, and we expect markets to recover as the situation cools again:

  • North Korea risk fatigue appears to be kicking in. Large declines in the KOSPI this year (1% or more) have been equally likely to stem from global tech weakness as from tension with North Korea. Pyongyang’s missile tests have corresponded with an average single-day decline of just 0.1%.
  • The timing of the test, at the tail end of joint US-South Korea war games and as calls for diplomatic talks gather pace, suggests posturing rather than intensification.
  • The missile’s flight path may rattle Tokyo. But with China to the West and Russia to the North, an eastward missile well away from US forces in Guam appears the least likely to trigger a military response.

While we will continue to monitor developments on the Korean Peninsula, periodic flare-ups do not overshadow the strong economic backdrop and corporate fundamentals worldwide. We remain overweight global equities.

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