ChatGPT on possible effect China-Taiwan war on MSCI All Country Mutual Fund

[ChapInTokyo]

I asked ChatGPT about the possible effects of a China invasion of Taiwan on an investment in MSCI All Country mutual fund. It thought that considering defensive assets like government bonds, gold etc could be useful. Certainly some food for thought there.

Q. In the event China invades Taiwan and the US and its allies in Asia are drawn into a war, what are the expected effects of a war on the net investment value of a MSCI All Country Mutual fund holding?
A. If China invades Taiwan and a conflict escalates involving the US and its allies, it would likely have significant and multifaceted effects on global markets, including the net investment value of a MSCI All Country Mutual Fund (which tracks the performance of stocks from both developed and emerging markets worldwide). Here are some key considerations and potential impacts:

### Immediate Market Reaction
1. **Market Volatility**: An immediate spike in global market volatility is expected. Stock markets worldwide might see sharp declines as investors move to safer assets like government bonds, gold, or cash.
2. **Risk Aversion**: There would be a flight to safety, with increased demand for US Treasuries, the US dollar, and other traditional safe-haven assets. Equity markets, especially in regions close to the conflict, could suffer significant losses.

### Regional Impacts
1. **Asia-Pacific Markets**: Markets in the Asia-Pacific region, including China, Taiwan, Japan, and South Korea, would likely be the most affected. These markets could see severe declines due to proximity to the conflict and potential disruptions to trade and supply chains.
2. **US and European Markets**: While these markets would also experience downturns due to increased global risk, the effects might be less severe than in Asia. However, sectors with significant exposure to Asia or those reliant on global supply chains could be particularly hard hit.

### Economic Effects
1. **Global Supply Chains**: Disruptions to global supply chains, especially in technology and manufacturing, could be severe. Taiwan is a critical hub for semiconductor manufacturing, and any conflict would likely impact the global tech industry.
2. **Trade Disruptions**: Trade routes and economic ties between China, Taiwan, and the rest of the world would be disrupted, affecting global trade volumes and economic growth.

### Sector-Specific Impacts
1. **Technology Sector**: Given Taiwan’s pivotal role in the semiconductor industry, companies in the technology sector could face significant challenges. This could impact stock prices of major tech companies globally.
2. **Energy and Commodities**: There might be price volatility in energy and commodities markets due to disruptions in supply chains and potential economic sanctions.

### Long-Term Considerations
1. **Economic Sanctions and Retaliation**: Sanctions against China and potential retaliatory measures could have long-term economic impacts, affecting global trade and investment flows.
2. **Geopolitical Realignment**: A prolonged conflict could lead to a realignment of global alliances and trade relationships, potentially creating new economic blocs and altering the investment landscape.

### Investment Strategy for MSCI All Country Mutual Fund
1. **Diversification Benefits**: While an MSCI All Country Mutual Fund is diversified across regions and sectors, the interconnectedness of global markets means that widespread declines are likely.
2. **Risk Mitigation**: Diversification within the fund may help mitigate some risks, but heavy exposure to affected regions or sectors (e.g., technology, Asia-Pacific) could result in significant losses.

### Possible Actions
1. **Reassess Risk Exposure**: Review the fund’s allocation to understand its exposure to regions and sectors most likely to be impacted by the conflict.
2. **Consider Defensive Assets**: In light of increased volatility, consider balancing the portfolio with defensive assets such as government bonds, gold, or other safe-haven investments.
3. **Stay Informed**: Keep abreast of geopolitical developments and their potential impacts on global markets to make informed decisions about portfolio adjustments.

### Conclusion
A conflict involving China, Taiwan, and major global powers would likely have severe and immediate negative impacts on the net investment value of a MSCI All Country Mutual Fund due to increased market volatility, disruptions to global supply chains, and economic uncertainty. Diversification provides some protection, but significant exposure to affected regions and sectors could lead to substantial losses. Investors should consider rebalancing their portfolios to mitigate risks and stay informed about geopolitical developments.

[Tsumitate Wrestler]

I do not think this level of analysis is worth discussing. I think you are relying too much on A.I to do your research for you.

If it is a topic you are interested in I would suggest something like The Economist Foreign Policy.

[RetireJapan]

I asked ChatGPT about the possible effects of a China invasion of Taiwan on an investment in MSCI All Country mutual fund.

ChatGPT is not a great source.

I would be more worried about China bombing all the US bases in Japan if they end up in a shooting war

[ChapInTokyo]

Good idea. I googled "the economist on the effect of a China Taiwan war on world economy" and this article "The Global Economic Disruptions from a Taiwan Conflict" from the Rhodium Group came out on top. Very detailed stuff.

While absolute trade values at stake are high, the most serious economic impact would come from disruptions to semiconductor supply chains and related downstream industries. Taiwan produces 92% of the world’s most advanced logic chips (at node sizes less than 10 nanometers in size), as well as a third to half of the global output for less sophisticated but nonetheless critical chips.5 By some estimates, Taiwan’s leading chip foundry TSMC produces 35% of the world’s automotive microcontrollers and 70% of the world’s smartphone chipsets. It also dominates in the production of chips for high-end graphics processing units in PCs and servers. A rough, conservative estimate of dependence on Taiwanese chips suggests that companies in these industries could be forced to forego as much as $1.6 trillion in revenue annually in the event of a blockade.6

Collectively, our estimates of global disruption from a Taiwan conflict would put well over two trillion dollars in economic activity at risk, even before factoring in the impact from international sanctions or a military response. This note offers a look at just some of the likely disruption channels in a blockade scenario, and this figure should be regarded as a floor; the full scope of imperiled activity would surely be greater. Importantly, most of these disruptions would materialize almost immediately (particularly the impacts in financial markets) and would be hard to reverse. These impacts would be felt across the global economy, including in countries that may appear to be only tangentially linked to Taiwan.
https://rhg.com/research/taiwan-economic-disruptions/

[captainspoke]

Looks like you're on a chat GPT binge--the universal elixir for everything?

[ChapInTokyo]

Looks like you're on a chat GPT binge--the universal elixir for everything?

Well, actually I was testing out ChatGPT on these investment related topics because Firstrade (my main broker) has just soft launched their FirstradeGPT (Beta) which turned out to be horrible. Totally useless. So I decided to test out ChatGPT on similar topics and found GPT-4o to be vastly superior to the supposedly finance savvy FirstradeGPT lol!



Anyway, gen AI is obviously a work in progress, but if you can imagine what the internet was like back in NCSA Mosaic and dial-up modem days, I can tell you that it's great fun playing with this new tech in its infancy!

[captainspoke]

...
Anyway, gen AI is obviously a work in progress, but if you can imagine what the internet was like back in NCSA Mosaic and dial-up modem days, I can tell you that it's great fun playing with this new tech!

So play with it.

Just don't bet the farm on it.

Or maybe go ahead and do that and let us know how it turns out?

(and yes, I know what a dial-up mating call sounds like)

[ChapInTokyo]

...
Anyway, gen AI is obviously a work in progress, but if you can imagine what the internet was like back in NCSA Mosaic and dial-up modem days, I can tell you that it's great fun playing with this new tech!

So play with it.

Just don't bet the farm on it.

Or maybe go ahead and do that and let us know how it turns out?

(and yes, I know what a dial-up mating call sounds like)

Absolutely! I currently have a 47:20:33 allocation between SHV:VPLS:BNDX but with interest rate cuts on the horizon I think it probably makes sense to increase the VPLS allocation to 30 and maybe gradually shift the SHV allocation to a somewhat longer duration BSV this summer. I'll definitely report back here if this turns out to be a great mistake!

[zeroshiki]

I am legitimately unsure if this is a troll or not. Are you seriously asking us to comment on some disaster scenario ChatGPT came up with? You should read up on how LLM's work. Its not actually making any conclusions of its own. Its basically trying to figure out what word comes after the previous word it put out using training sets its been fed.

[ChapInTokyo]

I am legitimately unsure if this is a troll or not. Are you seriously asking us to comment on some disaster scenario ChatGPT came up with? You should read up on how LLM's work. Its not actually making any conclusions of its own. Its basically trying to figure out what word comes after the previous word it put out using training sets its been fed.

It is always good to take the output from an LLM with a grain of salt. However, an LLM does not "come up with" disaster scenarios all on its own. It probalistically puts together a plausible answer from all the data that it has been trained on. If you are not keen on talking about output from an LLM, perhaps this paper on the topic written by researchers at the Rhodium group would be worth a glance?

The Global Economic Disruptions from a Taiwan Conflict
Recent tensions in the Taiwan Strait have stoked fears of a conflict between China and Taiwan and raised questions about the implications of such a scenario for the global economy.

Charlie Vest, Agatha Kratz and Reva Goujon
December 14, 2022

Immense global disruptions, even under conservative assumptions
In a blockade scenario, the most significant disruption to global economic activity would come from a halt to Taiwan’s trade with the world, particularly in semiconductors. Associated disruptions to global supply chains—especially in major chip-consuming sectors such as electronics, automotive, and computing—would have grave repercussions for the world economy. Global trade with China would also decline due to a contraction in global trade financing, shocking the global economy and potentially triggering debt crises among China’s more fragile trade partners.
https://rhg.com/research/taiwan-economic-disruptions/