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The threat of U.S. military intervention in Syria has held global investors captive this month, resulting in excessive volatility for certain equity and commodity prices. Markets this week rallied on expectations such a military strike may be avoided, but most analysts believe the turmoil surrounding the situation is far from over and could persist for weeks to come.
If so, it will remain the biggest geopolitical risk investors will have to deal with this fall, but, like it or not, it won’t be the only one they will face. “The challenge is a big one,” said Pierre Fournier, a geopolitical analyst at National Bank Financial. “Geopolitics are not always predictable, but neither are company earnings, so you have to take notice.”
In its truest sense, geopolitical risk encompasses both geographic and political factors that could positively or negatively impact capital markets. This includes events such as civil wars, labour strikes and general elections, as well as highly politicized affairs like the upcoming U.S. budget deadlines and Silvio Berlusconi’s possible expulsion in Italy.
Mr. Fournier’s analysis also includes demographic trends, cultural and religious dynamics and structural economic issues that may impact the long-term stability of a nation or region. He spends time, for example, on the impact tribal factions have on Africa’s mining industry, and what kinds of jobs might be created in the U.S. 10 years from now.
Ideally, he believes investors should consider as many of the myriad geopolitical risks out there as possible, because doing so often creates value. “When geopolitical risk flares up, markets generally overshoot on the upside and the downside,” he said. “That is why there is opportunity.”
Unfortunately, many investors shy away from such analysis because of the complexity involved and their general lack of expertise on the topic.
That’s understandable, Mr. Fournier said, because before emerging markets became important to investors in recent years, most investors only looked at Europe, the U.S. and, of course, Canada where the risks are largely economic.
“But with the emergence of new economies in Africa, Asia and Latin America becoming investment destinations, you haven’t any choice but to adjust,” he said. “It’s a slow adjustment, but there are many, many cases where we and others have successfully predicted, for instance, that some gold companies in Africa would not be as rewarding as ones in Mexico or Canada even though the ounces in the ground were comparable.”
Investors increasingly have no choice but to acknowledge these risk factors. Global markets over the past couple of years have been rattled by several geopolitical events such as the Arab Spring in 2011 and the U.S. debt-ceiling talks.
So far, 2013 had been relatively quiet, but recent months have seen unprecedented mass protests in Brazil, Turkey and Egypt.
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