Political change on a global level has done more to create chances than to destroy them
At the beginning of the year, I gave a talk about “geopolitical risk” to a big conference of investors. I trotted briskly around the course: Russia, the Middle East, the South China Sea, the eurozone. Afterwards, I was having coffee with one of the other speakers, a celebrated private-equity investor, and asked him how much he thought about geopolitical risk.
“Hardly at all,” he replied. “We look at the companies, the cash flows, the investments themselves.”
Since the man I was speaking to is a billionaire, who ended the conversation by offering me a lift to Madrid in his private jet, it would be foolish to dismiss his views. Most of the time, it does make sense for investors to treat the political news as background noise, which is only marginally more relevant than the sports pages.
Events that are tragedies at a human level turn out to be irrelevant for investors. The unfolding war in Syria, which has claimed close to 200,000 lives, has taken place against a background of booming stock markets.
The disconnect between the markets and politics has been particularly stark recently. Last week, even as the newspapers were filled with stories about war in Ukraine and the Middle East – as well as the possible break-up of the UK – the FTSE 100 hit a new 14-year high. The previous week, the US S&P 500 broke 2,000 for the first time.
The standard response to all this from a political commentator would be to tut-tut about the short-sightedness of investors. But there is another possibility. Maybe the markets are right. Of course, from time to time, a political shock will cause stocks to fall – for a while. But recent experience suggests that the recovery is often surprisingly rapid.
In the first week of trading after the terror attacks of 9/11, the Dow Jones fell by 14 per cent. But the Dow and the Nasdaq had recovered their pre-9/11 levels within months of the attacks.
It has been a long time since international politics really transformed the outlook for investors for years – rather than for weeks or months. The last times I can think of were the oil-shocks of the 1970s that followed the Arab-Israeli war of 1973 and the Iranian revolution of 1979.
Since then, the world has been characterised less by geopolitical risk than by the much less often cited idea of geopolitical opportunity. It was the political changes brought about by the end of Maoism that led to the economic transformation of China. Huge new markets also opened up for investors in Europe, after the fall of the Berlin Wall. The fall of dictatorships in Latin America in the 1980s was also followed by the widespread adoption of more market-friendly policies.
So it would be completely wrong to say that global politics has not mattered for investors in recent decades. It is just that political change – on a global level – has done more to create opportunities than to destroy them.
Within that, of course, there are all sort of political events that can adversely affect the investment climate in particular countries. It is useful to know if a coup or a war is brewing. But the big global shifts in investor sentiment, in recent decades, have been driven by economics, not politics: most notably the bursting of the dotcom bubble in 2000, the financial crisis of 2008 and quantitative easing in the US.
The explanation for current market highs is probably that investors are still much more preoccupied by monetary policy than by wars. But can that attitude survive the current bout of geopolitical turmoil? In the 1970s, war and revolution drove energy prices to levels that shocked western economies into recession. Now, two of the major energy-producing regions of the world – Russia and the Middle East – are in turmoil. And yet the oil price is actually falling.
There are a few reasons why this could be happening. First, the “shale revolution” in the US has made world energy markets less vulnerable to events in the Middle East. Second, the fighting in the Arab world has not yet affected the oil production of Saudi Arabia or the Gulf states. Finally, Russia has not yet made serious threats of energy sanctions against the west. If war reached the Gulf, or Russia turned off its energy tap, markets surely would panic.
There is also a bigger and more general political threat that investors may soon have to grapple with. For the past 40 years, political change has broadly pointed in one direction – towards more and more countries joining the global market system, increasing opportunities for trade.
Recently, however, there have been reminders that politics can close markets as well as open them. Japanese firms saw their sales plummet in China, after the rise in Sino-Japanese tensions and have reduced their direct investments in China by 50 per cent this year. Now Russia and the west are engaged in rounds of tit-for-tat sanctions. Unsurprisingly, the Russian stock market is the worst performing big market this year.
However, even investors without a direct stake in Russia, should be paying attention. The Ukraine conflict could still worsen and spread, with unpredictable effects across Europe.
It is also possible that what is happening in Russia is an extreme version of a wider phenomenon – the return of nationalist politics. In different ways that theme can be seen in countries as diverse as China, India, Egypt – and even France and Scotland. Nationalism and international investment tend not to be comfortable bedfellows. Sooner or later, the revival of nationalism could even affect plutocrats in their private jets.
