MONTREAL—Geopolitical risk is running high despite all seeming well with U.S. stock markets, but evaluating broader trends, which include “de-globalization” and China’s economic transition on asset prices and inflation, is critical at this time.
Volatility—the degree of fear in the market that can be measured by the VIX (S&P 500 volatility)—is extremely low. Meanwhile an elevated level of policy-related economic uncertainty prevails; investors have little confidence that impending government actions will work.
“It’s a little bit spooky how disengaged the two have been to each other,” said Lisa Emsbo-Mattingly, Fidelity Investment’s global asset allocation director of research, at the International Economic Forum of the Americas on June 12.
While it seems the world is heading for a period of synchronized economic growth, geopolitics—or non-market factors—such as aging populations and rising inequality remain headwinds.
Diversification has always been critical for investors to smooth market ups and downs on a path to achieving financial goals. In times of market stress, asset prices tend to move together (increased correlation) and it becomes costly to change a portfolio’s investment mix due to greater costs for buying and selling (worse liquidity).
Domestic Focus
With globalization having distributed economic growth toward emerging and frontier markets, the U.S. hegemony has been eroded, said Marko Papic, senior vice president of Geopolitical Strategy at BCA Research, a 68-year-old Montreal-based independent investment firm.
“We know from history, when more countries get to say and pursue what they want, it is a less stable world,” Papic said. “Today we have the highest number of conflicts going on at the same time.”
China has its eye on filling the void left by the United States as the post-Cold War order crumbles. Under Donald Trump, German Chancellor Angela Merkel said the United States can no longer be a reliable partner.
