Duterte said. Photographer: Veejay Villafranca/Bloomberg

Philippines President Rodrigo Duterte’s flip-flops and North Korea’s leader Kim Jongun’s missile tests have saved South China Sea peace, for now, as both major players in the disputes China and the US have been softening their tone lately.

That’s good news for investors in the equities of the region, as it lowers geopolitical risks. And that may sound paradoxical to some. How is it that Duterte’s flip-flops and Kim Jong-un’s missile firings can advance peace in South China Sea?

By changing the parameters of the game for China and the US.

ETF/Fund 3-month Performance (%) 12-month Performance (%)
iShares MSCI iShares China  (FXI) 4.58 17.64
VanEck Vectors Vietnam ETF (VNM) 9.34 -2.81
iShares MSCI Philippines (EPHE) -7.28 -5.14
iShares MSCI Emerging Markets 14.08 17.47

Source: Finance.yahoo.com  3/20/2017

Last July Philippines and its close ally, the U.S., won an international arbitration ruling that China has no historic title over the waters of the South China Sea. Yet Philippines’ President Rodrigo Duterte shocked the global community and financial markets by siding with China on the dispute, and seeking a “divorce” from the U.S. Duterte’s flip-flop left the US without a key ally to advance its cause in South China Sea, and therefore, no choice but to soften its tone.

Never mind that China continues its activities around the Scarborough Shoal. “So what do you want me to do? Declare war against China?” Duterte quoted in Chinatopix asking reporters. “I can but we’ll lose all our military and policemen tomorrow, and we are a destroyed nation. And we cannot assert even a single sentence of any provision that we signed.”  

Then came Kim Jongun’s missile tests to change America’s foreign policy priorities placing the Korean Peninsula and the containment of North Korea ahead of South China Sea; and China can make the difference as to whether America achieves this objective. This means that Washington must appease rather than antagonize Beijing at this point.

While Duterte’s flip flops and Kim Jongun’s missile tests have saved peace for the time being, it’s hard to see how they will save peace in the future, as both leaders are unpredictable.  

That’s why investors should constantly keep an eye on the geopolitical risks in the South China Sea region markets.