Putting Geopolitical Tensions into Perspective

When world leaders talk, markets react. And with social media becoming mainstream, politicians have a new way of getting their message to the masses. John Beck, Franklin Templeton Fixed Income Group senior vice president and director of fixed income, London, recently recorded a podcast where he discusses geopolitical tensions and the impact of social media. Looking across the globe, he outlines some market challenges within today’s highly charged landscape as well as the potential investment opportunities.

Richard Banks: John, let’s start the discussion in an area that is generating headlines at the moment—North Korea and the volatility there. How do you view the situation as an investor, and how do you see the markets responding?

John Beck: The tensions in Northeast Asia, North Korea, Japan, US, China, I think you really cannot plan because the worst binary outcome is so unthinkable that one can’t really plan for it. So you do see the knee-jerk reaction, which is a ballistic missile is fired over the Sea of Japan, over Hokkaido, Japanese yen rallies. When [Japan’s Prime Minister Shinzo] Abe says, “well, we are not going to shoot down a missile that we know is not going to land on us and we’d already projected that it was going to overfly Japan,” yes it ratchets up geopolitical tensions.

Richard Banks: I recently caught up with a colleague of yours, Carlos Hardenberg, senior vice president and managing director, Templeton Emerging Markets Group. He gave some perspective from our resources in the region. Let’s take a listen.

Carlos Hardenberg: What our local colleagues are telling us, they do not expect this situation to get out of control…of course no one has any certainty at this point in time. But the Koreans themselves believe that there is a lot room to negotiate and there’s a lot of room to get all of the parties involved to settle at some solution which is certainly not a military conflict. If you were to assume the worst-case scenario there, and a conflict between the involved countries, I think the whole world will be impacted by it.

Richard Banks: Carlos’ thoughts, John, seem to be very similar to yours, and while everyone is concerned, you also try to be optimistic.

John Beck: I don’t think you have that catalyst of crisis point. So what have we seen? I mean, again, I think it’s interesting to look at the development for example of 10-year Treasuries year-to-date. When we were at the height of North Korean tension, 10-year Treasuries were close to 2% in yield. If you took a month-end close of 10-year Treasuries this year, with the exception of the end of August when we did have that height of geopolitical tension, you would struggle really to say that a whole lot had gone on because we [Treasuries] have been largely range bound, so I think one has to be aware there is a degree of political tension and maybe that is the reason the Japanese yen is trading at the level it’s trading at.

Whereas we think from an interest-rate perspective, it [Japanese yen] probably should be trading a little bit weaker. So you have to factor some of those things into your investment process, but I think you have to keep your eye very much on the medium-term growth factors because you simply cannot plan for the impossible and the unknown.