Could the North Korea crisis make the FTSE 100 slump to an all-time low?
At the time of writing, the world faces the prospect of a highly uncertain period. Geopolitical risk is possibly at its highest level for a number of years, with the situation in North Korea having the potential to escalate yet further. With such a risk having the prospect of impacting on the performance of the FTSE 100 in the short run, it is clearly a news item which needs to be factored into all investment-related decisions.
Clearly, it is impossible to accurately predict how the situation involving North Korea will progress. However, military action is a very real possibility. Further missile launches cannot be ruled out, and this could cause the US to respond by using military force. In such a scenario, there would be widespread fear and uncertainty among investors, since the outlook for the global economy could deteriorate as consumer and business confidence would be likely to decline.
If military action takes place, it seems highly likely that the FTSE 100 will experience a significant decline. Already, it has fallen by over 1% on days where the potential for military action has been highlighted due to strong rhetoric or a missile launch. If this was to develop into a conflict, then a fall of well in excess of 1% of the index's value within one day would be highly likely. This situation could continue over a sustained period and push the FTSE 100's level downwards depending on the scale of the conflict and how long it lasts.
If a conflict is the end result of the current tensions involving North Korea, the potential loss of life will clearly be of far greater importance than a fall in share prices. However, if the FTSE 100 does fall as a result of military action, it could prove to be a buying opportunity for long-term investors.
The last time there was a major conflict which caused a fall in UK share prices was the Iraq war in 2003. This was a catalyst in pushing the FTSE 100 down to an eight-year low of around 3,400 points. However, the index quickly recovered and just four years later it had almost doubled when the credit crunch commenced. Therefore, that scenario can be looked back on as having been an opportunity to buy high quality companies while they were trading at low prices.
The uncertainty caused by geopolitical risk concerning North Korea may lead to a major fall in the FTSE 100. The extent of it depends on the severity of the situation and it is therefore incredibly difficult to predict. However, if the index does fall then it could be an opportune moment to buy shares for the long term. Doing so may seem foolhardy given the risks ahead, but history shows that such scenarios can lead to large gains in the long run.
Peter Stephenshas no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.