Should You Be Worried About Geopolitical Risk ?
European markets and Dow Futures seems celebrating on the news of today’s French Presidential Election result. FTSE , DAX and CAC 40 all up by 2-4% at the time writing and Dow Future also up by more than 200 points.
Recently, investors seems given more concerns to geopolitical issues where it has dominated the market move base on their preliminary or final results , since BREXIT referendum on June 2016 and follow by US Presidential Election on Nov 2016.
Definition of “ Geopolitical Risk by Wikipedia : ( Here )
What is 'Political Risk'
Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers or military control. Political risk is also known as "geopolitical risk," and becomes more of a factor as the time horizon of an investment gets longer.
BREAKING DOWN 'Political Risk'
Political risks are notoriously hard to quantify because there are limited sample sizes or case studies when discussing an individual nation. Some political risks can be insured against through international agencies or other government bodies.
The outcome of a political risk could drag down investment returns or even go so far as to remove the ability to withdraw capital from an investment.
Unless you are traders or speculators who are watching and monitoring the market closely due to your short term position, our investment decision should not swing as the mood change due to these news.
We do see tremendous amounts of geopolitical risk and its potential to move markets very aggressively in short term periods.
However, history tells us that financial markets are capable of absorbing a great deal of negative news and pricing in that information accordingly.
In the long run, much of how the world operates is still based on supply/demand fundamentals – how strong is the consumer demand, what is the price of oil, are we seeing capital expenditures in developed economies and how quickly are emerging markets growing as well as companies earning growth etc .
Warren Buffett has a great article on 16 Oct 2008 with title “ Buy American ,I Am “ right after the Sub-prime crisis which eventually turned into full-blown Global Financial Crisis ( GFC ).
He wrote :
“A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s , the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. “
Amidst all the noise and the scary volatility, Mr. Buffett was urging all to stay calm and look for long term. You may find the full article (here ).
For sure, market will continue to be volatile as French will have second round of election on 7 May 2017 and follow by German Federal Election on 24 Sep 2017.
Will your mood swing as you see the market move like pendulum as well as your decision making on your investment.
“Investing should be like watching paint dry or watching grass grow. If you want excitement…go to Las Vegas.” Paul Samuelson