Why Stocks Keep Shrugging Off Wars, and One Robert Kaplan Says They Can’t

What is war good for? Apparently, the markets. 

Despite current conflicts in Ukraine and Iran, as well as in Iraq and Afghanistan in the earlier part of the century, the major stock market indexes have been able to price in potential shocks and still climb to record highs. Their performance has been quite remarkable, says Robert Kaplan, a prominent geopolitical analyst, bestselling author and senior fellow at the Foreign Policy Research Institute. “Markets handle geopolitics very well,” he said at the EDGE conference in Boca Raton, Florida, on Tuesday. “You don’t notice that much of a change when you look at your retirement emails once a month.”

While individual sectors, particularly energy, have reacted sharply in recent months, advisors who stayed the course have largely been rewarded with a historic bull run. “Everyone talks about how  investment advisors have to factor in geopolitics, but I haven’t seen it,” he said. “The markets have been incredibly resilient.”

War, What Is It Good For?

There’s one major caveat, however. A war in Taiwan, which China’s government views as a breakway territory, could be more than just a stock market correction, becoming an “extinction level” financial event that Kaplan said might take a decade to recover from. It could force a market correction of 40% to 50%, he said, and one the Federal Reserve would be powerless to stop. “It would be like World War I,” he said. 

The problem is, unlike conflicts in Ukraine or the Middle East, a war involving Taiwan would directly threaten global supply chains. Taiwan produces many of the world’s most advanced semiconductors, while the surrounding waterways are among the most important chokepoints for commercial shipping lanes on the planet. Almost half of all the world’s oil flows from the Middle East through the South China Sea, Kaplan said. 

For advisors, the lesson isn’t about predicting geopolitical events, but understanding which ones actually matter. 

Exchange-traded funds that have the highest exposure to Taiwan include:

• The Franklin FTSE Taiwan ETF (FLTW), which is 98% weighted in the country and has gained 63% this year.
• The iShares MSCI Taiwan ETF (EWT), which also has around 98% of its holdings in Taiwan-based companies, and has risen 57% over the same period, according to etfdb.com.

Change Happens. The good news is that geopolitical currents can change direction quickly. The war in Iran, for instance, could force a regime change in just a few years, potentially unleashing some 85 million “highly educated, high tech” Iranians into the global workforce. The country might transform almost overnight, Kaplan said. “You may be grappling with the idea of investing in Iran, as crazy as that sounds.”