Global geopolitical events are in the media more than ever and it is widely believed that risks have not been this high for a very long time.
Hong Kong saw record crowds protesting Beijing's renege on its old promise to allow for free Hong Kong elections by the year 2017. Ukraine fighting and grandstanding by Russians have resulted in a growing number of sanctions against Vladimir Putin's Russia. While painful, the sanctions appear to have had little effect on changing the Kremlin's mind in the near term.
Then there is ultra-violent ISIS which is now the target of a remarkable West-Arab alliance. As geopolitical risk analyst Ian Bremmer believes, the riskiest dispute on earth is the contested waterways and islands in the South China Sea involving China, Vietnam, Japan, Borneo and the Philippines.
Let's take the ISIS example. It is undeniable that the fundamentalist group is motivated, barbaric and a threat to the order in the Middle East, but the question one ultimately has to ask themselves as it relates to their investments is, how will this affect the sentiment of investors and what effect will it have on corporate earnings moving forward? The simplest answer is, it should not in a material way. Although in recent weeks we have experienced weakness in global markets and one may think it is entirely due to these headlines, it is actually a combination of things.
The current market selloff for the TSX over the past six weeks (at time of writing) is about 10 per cent and many investors likely believe it is because of the aforementioned headlines, but there are other reasons that need to be monitored. The market is digesting weakness in Europe, a stronger U.S. dollar which is putting downward pressure on commodities, the IMF has reduced global growth forecasts, the end of QE3 later this month and the 10 year treasury yield moving under two per cent. All of this on top of the geopolitical issues are causing investors to reduce their exposure to equities, but I believe the bull market continues to be intact and investors should take advantage of this current drop in stock prices over the next few weeks.
Geopolitical episodes tend to garner most of the attention in mainstream media, but it is the fundamentals that ultimately drive stock returns over the long run. This is not to say that geopolitical risk should be completely ignored as it can give rise to uncertainty which is a negative for markets. It can also add to market volatility and be a drag on vulnerable markets as we are seeing as of late, but the current long-term secular bull market should not be broken.
Today's geopolitical headlines are very important issues that require debate and political action, but it would be a mistake to exaggerate their importance to most people's investments in the long run. Successful investors look past headlines that have little to no direct effect on the companies they are invested in, but continue to monitor not just geopolitical news but also economic data. There will always be headlines and a good financial advisor should evaluate which will matter to your portfolio and those that will not.
Lori Pinkowski is a portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Friday on CKNW at 5:35 p.m.
