If a cold war turns hot
Money Magazine Australia|September 2022
China’s plans for Taiwan are a known unknown. So, how should investors position for this risk?
Max Riaz
If a cold war turns hot

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

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