Responding to geopolitical events

In this article Quilter Investors’ investment strategist, Lindsay James, explains how geopolitical events affect our investment approach and the steps they are taking to protect investors.

The humanitarian crisis in Gaza continues to mount and our immediate thoughts are, naturally, with those caught up in the bitter war now raging between Israel, Hamas, and related militias in Syria and Lebanon.

However, as investment strategist, Lindsay James explains, we also have a duty to our investors to protect them from the impact of such geopolitical events.

For us, this means being humble enough to accept that unforeseen events arise and that, ultimately, even the best-informed investors have little advantage when it comes to predicting the direction of geopolitical events such as those unfolding in the Middle East.

The Brexit referendum, the global pandemic, and the invasion of Ukraine are all very recent examples of unforeseen geopolitical events. In each case, few professional investors succeeded in predicting any of these events and even fewer successfully predicted the effects each event would have on markets.

For that reason, we need to caution against the knee-jerk reaction of selling down more volatile asset classes, based on near-term events. Attempting to second-guess the outcome of a conflict, or predicting the next domino to fall, is no different from trying to ‘time the market’.

Contained conflict

As long as the conflict remains primarily contained in Gaza, the impact on oil and natural gas prices should also remain contained. Oil prices have been broadly declining in line with forecasts of falling economic demand and, so far, events in Gaza have not been sufficient to reverse this trend.

However, this could rapidly change if other states in the region become more involved, either directly or indirectly, especially major oil producers, such as Iran. At a time when inflation fears dominate market sentiment, any signs of oil prices rising strongly could have significant consequences for inflation, interest rates, and economic growth.

With the outcome remaining unclear, our role as investment experts is to keep a watchful eye and ensure that any responses on our part are based on known facts, not speculation.

Key portfolio drivers

The US remains the primary driver of global growth and, by extension, global equity markets. The US economy continues to demonstrate its resilience in the face of rising interest rates and high inflation, and the economic data remain sound. This gives us something tangible to position our portfolios against.

While we expect an economic slowdown as interest-rate hikes gradually restrict economic activity, US corporate earnings still have the scope to grow so long as the US labour market remains robust.

European exposure

As an energy importer, Europe appears most exposed to the escalating Gaza conflict. However, the picture is more nuanced than it might seem. Europe’s gas storage is already very high while the EU has diversified its gas supply chain since the outbreak of the Ukraine war; both have reduced the likely economic impacts of the conflict.

Seeing the big picture

Although geopolitical events don’t generally impact our strategy, we use them as an opportunity to review our positioning and to ensure it remains aligned with the objectives of our portfolios.

Even before the outbreak of a new war in the Middle East, global economic growth was slowing and bond yields were rising – meaning their prices were falling – reflecting the latest ‘higher for longer’ market narrative for interest rates. As such, we took the decision to tweak some of our portfolios by adding to defensive assets such as healthcare equities, large cap UK equities and some government bond positions.

Neither of these decisions were driven by the Gaza conflict; rather they were the result of a periodic review of our existing ‘tactical’ exposures and our view of the bigger picture.

It has been clear for some time that we are living in a more uncertain world, with Kristalina Georgieva, the head of the International Monetary Fund, having declared earlier this year that “the peace dividend is gone”. This shift has ramifications for longer-term investment positioning, which means we must be ever mindful of the unpredictable risks we live alongside, rather than justifying a reactive approach.

Managing the risks

Investment risks are always present, but it’s vital not to overreact. Accepting that we don’t have all the answers and ensuring a portfolio has sufficient diversification to cope with a range of possible outcomes, will always win out in the end over selling up at the first sign of trouble.

Should you have any concerns regarding recent events outlined in this article, please contact your financial adviser.

Henderson Stone Asset Management Ltd
Suite 3/1, Herbert House
26 Herbert Street
Glasgow G20 6NB

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Henderson Stone Asset Management Ltd is registered in Scotland. Company Number: SC585359. Registered address: Suite 3/1 Herbert House, 26 Herbert Street, Glasgow, Scotland, G20 6NB.