If a cold war turns hot

China’s plans for Taiwan are a known unknown. So, how should investors position for this risk?

- Max Riaz

In markets, as in life, there are risks we know and can price and plan for. Then there are risks we know that we don’t know (known unknowns) – you can still plan for these but not necessarily price them accurately. And, finally, there are “black swan” risks that we don’t know we don’t know (unknown unknowns) – you can neither price them nor plan for them.

Russia’s invasion of Ukraine was an unknown unknown risk – at least up to the point where Vladimir Putin started mobilising his army at Ukraine’s border in 2021, when it became a known unknown. We are seeing the consequences of that risk now manifesting through war in Ukraine and inflation across the world.

The Covid-19 pandemic was another unknown unknown risk that quickly transitioned to a known unknown for a few weeks in early 2020, when we started hearing stories of an unknown virus spreading overseas but couldn’t quite work out its economic impact – and then it inflicted itself with full force on the world.

So, by that definition of unknown unknown risks, I can’t enlighten you on what could be around the corner for markets as a black swan event.

However, there is currently a significant known unknown systemic risk of China walking into Taiwan. This will not be without a war, and the magnitude and economic consequences of that are anyone’s guess.

If I was to hazard a guess, we will most certainly be looking at military and economic consequences at multiples of what we have experienced from the Russia-Ukraine war.

Tactical allocations