Markets have been refreshingly tranquil in recent weeks, taking the US “tapering” decision in their stride and finishing a healthy year with a solid finish.
However, amongst the heavy eating and unnecessary drinking, events in the East have grabbed my attention over the last few weeks.
At a time when we should be applauding the Chinese and Japanese governments for their very different but mutually sensible economic reforms, we are sadly focussing on the sabre-rattling that is taking place over the Sea of Japan.
The South Korean government has also entered the fray, siding with China and castigating their Nipponese neighbours for the Prime Ministerial visit of the Yakusuni Shrine, where the Japanese celebrate their war heroes. Amongst those celebrated there are a number of Class A war criminals, whose acts in Manchuko and the rest of Asia in the Second World War remain understandably inflammatory to the Chinese and Koreans.
I seem to have spent an unnecessary amount of time writing about this shrine in my 10 year career. Interesting though it undoubtedly is, it would be very useful if the place was levelled and East Asian relations could improve.
Japanese prime minister Shinzo Abe would privately argue that his visit was a necessary response to the increase in Chinese aggression over the contested Senkaku/ Diaoyu islands and the imposition of a “no-fly zone” by the Chinese over the islands. The Japanese, contrary to other nations, including the US, are ignoring this.
The Chinese and Koreans are very concerned that Abe-san’s modus operandi has set the scene for a change to the Japanese “pacifist” constitution, which was drawn up by the Americans in the days after the Second World War.
The Japanese would counter-punch the charge sheet with the decision taken recently by China and Korea to jointly raise a statue to An Jung-Geun in Harbin, China. An is most famous for his 1909 assassination of Ito Hirobumi, a high Japanese official who served as prime minister and is credited with being one of the great modernizers of the period. Apparently this decision didn’t go down well up Tokyo.
Basically, the three nations are as bad as each other and all seem intent on driving a nationalist agenda.
The temperature rose further last week, as the Chinese and Korean governments have attacked the Abe’s administration blatant attempts to weaken the yen to spur the Japanese economy. This could be another flashpoint, as the Japanese seem keen to continue along this path.
These events matter a great deal to the global economy, not least because the US could be forced to take sides in the spat, which is likely to annoy one of the major players. Not even President Obama, whose foreign policy plan seems to have been drawn up by Rip van Winkle, can avoid getting embroiled in this serious situation. The Economist, who likened this series of events to the build-up to the First World War, believes that we are a stupid mistake away from a major conflict.
While we are not so cautious, (primarily because we ultimately believe that they will collectively recognise how mutually-dependent they all are) this drama in the East matters for our investment strategy, as we have highlighted Chinese and Japanese equities as some of the only attractive assets on offer in a world of limited value. We are overweight both countries’ equity markets across our strategies.
So we have our first major concern of 2014 and something we shouldn’t take lightly. This New Year would certainly be a lot happier for us if there was an overdue outbreak of common sense in North East Asia.
Thomas Becket is chief investment officer of Psigma Investment Management