What have we learned?
It’s now 12 months since the British voted to leave the European Union, an event that some saw as setting off a domino effect of other European countries looking to do the same. This was also followed by a messy election result in Australia, Donald Trump’s surprise victory in the US presidential election, increasing concern around North Korea and a steady flow of terrorist attacks. The combination of which seemed to highlight that geopolitics is now more important, and perhaps more threatening, for investors than had previously been the case. But while political developments have figured highly over the last year, the impact on markets has been benign. Since the Brexit vote, global shares are up 22% and Australian shares are up 13%. So what gives? This note looks at the main issues.
Why so little impact?
There are a number of reasons why the impact on investment markets from geopolitical events starting with Brexit has been short lived or non-existent over the last year or so:
Europeans have refused to play along
- “Trump the pragmatist” is dominating “Trump the populist”
- Global growth has improved
- Uncertainty over geopolitics has led to easier for longer monetary policy
- In Australia the Government was returned and the difficulties in the Senate really just mean a continuation of the past
Where are we now with geopolitical risks?
While the events of the last year highlight the importance of not getting too excited about geopolitical events, they are likely to remain important for investors to keep an eye on. There are several drivers of increasing geopolitical tensions:
- A backlash against economic rationalist policies
- The relative decline of the US is shifting us away from the unipolar world that dominated after the end of the Cold War
Global geopolitical issues to keep an eye on
The following looks at geopolitical issues worth watching:
- German election (September 24)
- Italian election (due by May 2018, but possibly later this year)
- Greece
- The US—impeachment risk
- The US—shutdown/debt ceiling risk
- Terrorism
- Iran v Saudi Arabia
- North Korea
- China/US relations
Implications for investors
Based on the experience of the last year around geopolitical risks, there are several implications for investors:
First, turn down the noise. Geopolitical issues create much interest and are great for dinner party conversations, but as we saw over the last year this does not mean they will necessarily have a huge negative impact on investment markets.
Second, it’s hard to quantitatively build geopolitical risks into an investment process. You really have to understand each issue separately.
Finally, the ultra short-term impact of the Brexit and Trump election shocks – with both seeing an initial fall in share markets followed by market strength – highlights the benefit in looking for the opportunities geopolitical shocks throw up.
