Geopolitical Risk and Investing - by Sidhavelayutham, CEO & Founder, Alice Blue

Bengaluru (Karnataka): In the current times, the world is connected more than ever. Globalization is just not about transporting goods and services from one country to another anymore. The meaning has expanded further to technology transfer, free trade agreements, regional policy tie-ups, defense partnerships etc. This means that an investor cannot just look at his/her resident country’s economic situation and invest in markets or other asset classes. One needs to have a closer look at how the economies around the world are doing in terms of their interest rates, inflation, growth, and regional co-operation and then decide which region/regions look attractive for investment and why. 

Amid all this, suddenly, if there is a war-like situation between a few countries, the implications on one’s favorite investment region could be big both at the market-level, as well as the specific sectors and stocks in which he/she is invested in. Now, this is called one of the geopolitical risks for the investor. 

If the Fed Chairman of the strongest economy, the US, says that he is ready for a rate cut now, the economies are so connected today that a majority of the countries would also start thinking about reducing their interest rates including India. This will create a favorable investment environment across the globe for investors who want to start allocation on the rate-sensitive and cyclical sectors like housing, automobile, banks etc.  

If one recalls the recent Israel-Hamas war that started in October this year, the global investor community went on a standstill trying to figure out how the global economies will react and where the oil prices are headed. The commodity happens to be the key export item for a lot of neighboring countries in the area. 

In fact, if one goes back a year in February 2022, when the Russia-Ukraine war started, Brent crude shot up from $85/bbl to above $100/bbl in no time. The war led to a very heavy inflationary situation across the Euro zone with rising commodity prices, especially energy and food. In order to curtail the impact of inflation, local banks start to increase interest rates across the globe.

From an equity market’s standpoint, the global institutional investors started to shift from risky asset classes like equity to safe havens such as gold for capital preservation and as an inflation-hedge at the same time. Additionally, they started to invest heavily in fixed-income instruments, fetching higher rates of return at a significantly lower risk level. 

Bad geopolitical situations between a few regions/countries can also be good for some other regions. For example, the rising US-China tensions open up a great opportunity for India to become a global supply-chain hub. The Russian oil that India has been getting at discounted prices has been a blessing in disguise for the country’s import bill as well. 

All these examples indicate that the weightage of geopolitical risk in an investor’s investment decision-making has certainly gone up significantly. Hence, these situations are crucial for every investor to understand and make informed and timely decisions. At the same time, investors should also remember that geopolitical risk is a systematic risk for which one can never be 100% ready. It keeps changing from bad to good and vice-versa, and one needs to identify that and focus on making long-term sustainable returns.