International conflict and political unrest can have a significant impact on an individual's investment portfolio. As your advisers, we at Trendlines aim to keep you up to date on current market expectations surrounding world events. We wish to keep you informed so that you are confident and comfortable knowing that your retirement savings are invested in a way that will best meet your future financial needs. This short blog post aims to provide an insight into the potential impacts of the political situation surrounding China and Taiwan on domestic and international equity markets.
Chinese and Taiwanese relations have been precarious ever since Taiwan took independence. Over the past six months there has been significant speculation surrounding the potential for military conflict between the two nations. China has conducted aerial drills and fired missiles over its cross straight neighbours, while Taiwan has sought diplomatic asylum with the US. The latter could be of particular concern to investors. International perception of China’s likelihood of military action has also changed recently. Senior strategists in the US military's Indo-Pacific command have put the likelihood of serious conflict between China and Taiwan at around 70% over the next seven years. Similarly, the CIA’s chief William Burns said that the US ‘would not underestimate President Xi’s determination to assert China’s control over Taiwan.’ Similarly, statistical modelling from Coolabah Capital Investments has placed a 50% likelihood on a China-Taiwan military conflict in the next five years, and a 75% likelihood in the next ten.
The US, with its far more robust economy, is likely to fare far better than China in the event of conflict. This is a positive for the typical investor. The majority of diversified conservative, balanced and growth superannuation fund investment options hold a far greater proportion of unaffected Australian and US equities, compared to potentially volatile Chinese companies. For a high growth investor, with a proportionately larger exposure to emerging markets (such as China and Taiwan), the potential conflict could have a more significant impact on their investment holdings.
While current world events can have an impact on investment returns in the short term, it is important to consider your investment horizon before making any changes to your portfolio. While emerging markets are likely to be more volatile over the short term, there is nothing to suggest that over the long term they will not revert back to their annual average return of around 10% (MSCI Emerging Market Index 1987-2022 annualised returns). A high growth investor with a long time until retirement can comfortably ride through any potential short term volatility, while remaining exposed to high growth emerging markets. However, an individual with a short term investment horizon and low risk tolerance may wish to consider altering their portfolio's construction to remove the volatility caused by the China Taiwan conflict.
As always if you wish to discuss any of the information above, or have questions about your own personal investment portfolio, please feel free to get in contact.