Dealing with Geopolitical Risks on Investors’ “Wall of Worry”Advice to the Advisor
“Even when the financial markets are growing at a healthy rate, under financially sound circumstances, investors always find reasons to worry,” Investopedia authors observe. While a ‘wall of worry’ commonly comprises concerns on numerous fronts, geopolitical issues are undoubtedly affecting consumer and investor sentiment given today’s headlines and happenings.
Interestingly, observes Sheaff Brock Managing Director Dave Gilreath, geopolitical risk is lower today than it has ever been. For one thing, there are more democracies in the world than ever before (at least historically, democratic countries very rarely, if ever, have gone to war with each other!). Capitalism (even in state-controlled forms such as in China), Gilreath submits, is considered to be the most attractive economic system throughout the world. As middle-class populations grow and demand for goods rises, the need for unevenly located resources (such as fossil fuels) increases, and both communication and interdependence increase accordingly.
Capital Group political economy analyst Talha Khan talks about investing in a “world of heightened geopolitical uncertainty.” Khan examined how S&P 500 stocks fared during 107 wars and 248 militarized disputes, finding that most conflicts posed only limited risks to the world economy. Clashes that threaten to disrupt global energy supplies have a more pronounced effect on stock prices, but, even then, “the S&P 500 often shows notable gains by the conclusion of tensions.”
It’s interesting to look back at the actual effects geopolitics has had on the markets at different points in history:
One change, she perceives, is that in times past, “stability was underpinned by perceived American dominance,” both economic and military. Today, by contrast, we are in a multipolar world in which a number of countries are pursuing individual nationalistic goals. Geopolitics, she believes, may be marked by more volatility in the equity markets when crises flare. Still, she remarks, “in regard to recent conflicts, it’s too early to draw conclusions. The S&P has held up relatively well this year as investors have focused more on improving economic conditions.”
Geopolitical risks will continue to be factors for investors to consider, Gilreath admits. Yet the markets’ ability to climb the “wall of worry” marks essential investor confidence that the interdependence of capitalistic countries will ultimately result in improved—and all-around—economic results.