|
 Terrorism, the Syria conflict, a refugee crisis threatening to
unpick European freedom of movement, a possible UK exit from the
European Union and tensions between Turkey and Russia are all on the
lengthening worry list.
But ask investors if they are changing their global portfolios or
trades to protect against these mounting risks and the answer is
generally either "no" or "not yet." It's an answer borne out on
global equity markets, which are just 7 percent off all-time highs
hit earlier in the year.
Indeed, the European Central Bank's decision to shave slightly less
than expected off its already negative deposit rate provoked far
more evident alarm in financial markets than the deadly but
unpriceable geopolitical risks.
"There are huge issues out there ... It's not too difficult to start
thinking this is history in the making, or that the geopolitical
fabric of the world is changing," said Paul O'Connor, co-head of
multi-asset at Henderson Global Investors.
"But for investors it's not really central yet."
So far there is little hard economic or trade impact that would
warrant global portfolio adjustments. Besides, financial markets are
still in thrall to macroeconomics and central bank decisions at a
time of ultra-low interest rates.
So, even as the World Economic Forum's top global risks in terms of
likelihood and impact include inter-state conflict, water crises and
cyber attacks, the world economy looks set to grow at a healthy clip
of 3.1 percent this year and 3.6 percent the next, according to the
International Monetary Fund.
And for all the risks in play, there are countervailing forces
suggesting these are not yet systemic.
For Barings Asset Management's Marino Valensise, the bigger picture
is still of a globalizing world in which trade barriers are falling
rather than rising.
China's currency has been admitted to the IMF's benchmark currency
basket and the recent Trans-Pacific trade pact suggests regional
trade barriers are coming down.
"We remain in the globalisation phase," said Valensise.
[to top of second column] |
To be sure, even if markets at a global level have largely shrugged
off geopolitical risk, there are clear pockets of stress at country
level, with MSCI's Eastern European share index , rattled by
Turkey-Russia tensions, at its lowest level since October.
But the problem remains: how to price or hedge such risks?
Poring over market performance since 1900 can offer some
counter-intuitive results. Historical data from the Credit Suisse
Research Institute shows the best year for world stock markets in
terms of real rate of return was 1933, while the worst was in 2008 -
despite progress towards globalisation.
In fact, on average, over the past 100 years, the premium attached
to periods of growing globalisation is around one point of the
price-to-earnings ratios on equities, according to Barings. While
there are many knock-on effects from fragmentation that are hard to
quantify, that valuation gap appears limited.
And hedging against geopolitical threats in today's environment can
also carry costs and risks. Henderson's O'Connor said that while
buying oil was once an obvious hedge against conflict in the Middle
East, the recent commodities slump, with crude near 6 1/2-year lows,
underscored the unpredictability.
So the likelihood is that even if headlines get worse, it will take
a lot more to unnerve global markets.
"So far, the spillovers have been quite contained," said O'Connor.
(Reporting by Lionel Laurent; Editing by Ruth Pitchford)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
