The Impact of Geopolitical Tensions on Global Markets
Market trends are shifting in response to current events, with news highlighting geopolitical concerns at the forefront of investors’ minds.
Political uncertainties have caused global markets to retreat from record highs, with investors facing the prospect of a more divided Europe, isolationist America, and a slowdown in global trade. According to Reuters, these developments have taken center stage in a matter of weeks.
Risks for State Funds
Geopolitical issues have surged to the top of the list of risks for state funds this year, with money flowing out of markets as a result of the impressive rise in tensions.
The Changing Global Political Landscape
Recent events around the world have highlighted a shift in the global political landscape, with potential flashpoints emerging in places like the stock market in Taiwan, prompting investors to seek safe havens such as gold, which reached historic highs last week.
The idea that the era of peace and free trade is coming to an end is gaining traction, with the next phase looking less prosperous. Nearly half of the world’s population voted this year, and the results so far underscore the change in mood: Taiwan elected a leader disliked by Beijing, voters in France leaned to the right, and the UK saw the largest left-wing majority in a generation settling in.
The Shocking Waves of the U.S. Presidential Campaign
Within just eight days, the presidential campaign in the USA has generated shocking waves: Donald Trump was shot at, and Joe Biden withdrew less than four months before election day.
The markets are adjusting to what is happening, and the news brought geopolitical concerns to the forefront for investors.
Geopolitical Concerns in the U.S. Presidential Campaign
“This is definitely one of the most important considerations we are working with in our process throughout the year,” says Eric Knutzen, Chief Investment Officer.
The Impact of Geopolitical Risks on Asset Management
As the director of multiple assets at Neuberger Berman, managing assets worth 481 billion dollars, the assessment of our overall risk levels in the portfolio is crucial,” he says. “An environment with heightened geopolitical risk would require you to reduce this risk range.”
This is already evident in prices, as markets immediately focus on two potential pitfalls that are likely to be exacerbated by Trump’s victory: inflation and restrictions or disruptions in semiconductor sales, especially for Taiwan.
Gold, considered a hedge against geopolitical risks, is already seeing an increase in demand as investors seek safer assets amidst uncertain times.
The Impact of Political Events on Gold Prices
In times of uncertainty and distrust, inflation and benefiting from demand by central banks have caused gold prices to soar to record highs, surpassing $2450 per ounce in the days following the attempted attack on Trump – an event that has energized his supporters.
“All of Trump’s policies are likely to be inflationary – whether tax cuts, immigration, or bringing back production, and therefore the dollar is bearish… so the dollar is likely to depreciate against gold,” commented Prashant Kotari, CEO of Alpha Alternatives.
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The Impact of Geopolitical Tensions on Taiwan Semiconductor Manufacturing Co
More than $100 billion were wiped off the market value of Taiwan Semiconductor Manufacturing Co in less than a week, after Trump made ambiguous comments about his commitment to protecting Taiwan and chip production.
Taiwan’s currency depreciated to its lowest level in over eight years on Monday, as investors began to avoid the island, which is a leader in chip manufacturing technologies, amid tensions between the US and China.
The return of this geopolitical risk has practically dampened enthusiasm for trading.
Extreme Risks
Norman Villemin, chief strategist at Union Bancaire Privée, warns about the risks associated with artificial intelligence (AI) hardware.
As money managers become increasingly confident that interest rates in the US will be lowered in September and the White House will remain in Republican hands, geopolitical concerns are seeping into long-term thinking about the world’s economic potential and the risks accumulating in the background.
High interest rates are starting to have a negative impact and China’s growth is slowing down. There are wars in the Middle East and on the edge of Europe, where major powers are on the brink.
The Impact of Political Tensions on Investment Strategies
David Bianco, Chief Investment Officer for North and South America at DWS, observes that political tensions remain high and the resulting consequences are likely to continue for decades to come.
He highlights the stocks of energy and defense companies, as well as commodities such as copper and uranium, as visible on the investment radar.
French stocks are lagging behind in Europe, and the yield on government debt has reached its largest difference compared to German bonds in a decade.
Concerns Over Disunity in Government
There are concerns that a divided government will be Eurosceptic and struggle to correct its balance.
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“French and Italian bonds are not heavily included in our portfolio, as we anticipate political noise while they negotiate a lower budget deficit,” says David Zan, head of fixed income instruments in Europe at Franklin Templeton.
Of course, there is no sense of panic in the sales that pushed the S&P 500.
Market Participants See a Healthy Pullback
With the market currently down about 3% from its all-time high, many market participants view this as a healthy pullback, a sort of reevaluation of how to trade political risks.
Low Volatility Despite Increasing Stock Market Fluctuations
Despite the increasing stock market fluctuations in the US, as measured by the VIX index, volatility remains low by historical standards. Since the beginning of last week, there have been no dramatic flows into tail-risk funds, which are designed to profit from extreme price movements in assets.
Geopolitics Not the Primary Focus of Financial Markets
Geopolitics has never been the primary focus of financial markets.
The Importance of Geopolitics in Investment Strategy
Mat Sherwood, head of multi-asset investment strategy at Perpetual in Sydney, emphasizes the significance of geopolitics in investment decisions. While many investors focus on interest rates and profit growth, Sherwood believes that geopolitical events can have a major impact on markets.
According to Sherwood, geopolitical issues have the potential to cause extreme effects that may disrupt financial markets. Therefore, he recommends that investors adopt a cheap diversification strategy that provides protection against downturns and potential for growth.
Currently, the question remains: how will extreme movements in the market affect six-month options? This uncertainty highlights the need for investors to consider geopolitical factors when developing their investment strategies. By incorporating geopolitical risk into their decision-making process, investors can better prepare for potential market disruptions and position themselves for success in the long term.
The Impact of Market Volatility on Investment Strategies
Market volatility can have a significant impact on investment strategies, causing assets to be undervalued and leading to a decrease in investor optimism. Recently, there have been notable purchases made in the market, signaling a weakening of the optimism that drove returns in previous cycles.
Pankaj Agarwal, a portfolio manager at the Singapore-based family company AT Capital, has been hedging his bets by reducing exposure to cash and purchasing index call spreads. This strategy is aimed at limiting potential losses in the face of market uncertainty, such as sharp declines in stock prices or sudden changes in currency values.
The End of an Era: Investors Brace for a Riskier Future
For thirty years, investors have enjoyed the largest era of globalization and geopolitical stability the world has ever seen,” says Michael Rowson, Chief Investment Officer at Angeles Investments in Santa Monica.
However, a new, riskier era is now beginning.
