Investing in a world of geopolitical risk
The past five years have seen the rise of major geopolitical risks, including political turmoil and significant conflicts between nations. How can investors and traders respond to this?
Global uncertainty on the rise
In recent years, the investment landscape has been increasingly shaped by geopolitical events. From contentious elections in major economies to escalating conflicts in various regions, investors are grappling with a new level of political volatility. This surge in geopolitical risk has prompted a significant shift in how investment firms approach their strategies and decision-making processes.
The rise of geopolitical experts
In response to these challenges, many investment companies are actively recruiting political scientists and creating dedicated geopolitical advisory units. This trend represents a marked departure from the traditional focus on mathematical modelling and financial analysis. Firms like Goldman Sachs, Lazard, and Rothschild & Co. have all made notable hires in this area, signalling the growing importance of political insight in investment decisions.
For now, markets remain calm
Despite the heightened awareness of geopolitical risks, financial markets have shown remarkable resilience. Stock indices continue to reach new highs, and oil prices have remained relatively stable even in the face of significant global conflicts. This apparent disconnect between perceived risk and market behaviour has left many in the industry puzzled.
How are investors adapting?
Some investors are taking concrete steps to adapt to the new geopolitical landscape. There has been a notable increase in funds that exclude China from emerging market investments, reflecting growing concerns about US-China tensions. Additionally, specialised funds focusing on areas like European sovereignty and critical technologies have emerged, catering to investors seeking to capitalise on or protect against geopolitical shifts.
Geopolitics takes the stage
The impact of geopolitical concerns is increasingly evident in corporate communications. Analysis shows a significant uptick in discussions of political risks during earnings calls and investor presentations, indicating that these issues are becoming central to business strategy across various sectors.
Do investors care about geopolitics?
Despite the increased focus on geopolitical risks, there's debate about whether this awareness is genuinely influencing investment decisions. Some industry observers argue that the fear of missing out on market rallies often outweighs concerns about potential political risks, leading to a gap between rhetoric and action.
The investment industry's structure may actually discourage proactive responses to political risks. Portfolio managers might be more penalised for missing out on market gains due to caution than for losses resulting from unforeseen political events that affect the entire market.
The outlook – balancing caution & opportunity
As the investment world grapples with this new era of heightened geopolitical tension, finding the right balance between caution and opportunity remains a significant challenge. While the historical resilience of markets to political shocks provides some comfort, experts warn against complacency. The true test may come when a major geopolitical event disrupts the long-standing patterns of market behaviour, potentially reshaping the investment landscape in profound and lasting ways.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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