In an editorial published yesterday by Credit Suisse Research, the global bank argued that while the “surge” in geopolitical risk in global markets as a result of increased tensions in the Ukraine and throughout the Arab world may add to uncertainty, it should not dictate widespread changes to investment strategy.
“Geopolitical risks have made a comeback in the past few years, with a surge in recent months,” the report states. “They may temporarily reduce returns for various riskier assets, which may call for a temporary “de-risking” of portfolios, but not for a fundamental change in asset allocation.”
Various global asset classes have been impacted differently by the recent spike in geopolitical conflicts, the report argues, offering the example of the domestic German stock market – or Deutscher Aktien Index (DAX) – being hit hard, in contrast to US equities, which have been performing well.
Moreover, the report argues that the “biggest long-term geopolitical shift” affecting financial markets is not the spike in conflict zones but the “progressive relative decline of the USA”, which may see new long-term investment opportunities arise in Russia and China in particular as a “new geopolitical equilibrium” emerges.
In addition, Credit Suisse points out that historically, geopolitical risk has only ever had a very peripheral or short-term impact on financial markets, with sustained impacts highly unlikely.
“The only three individual geopolitical events we have identified over the last 100 years that had a major and persistent impact are the German invasion of France in 1940, the start of the First World War, and the Yom Kippur War and subsequent oil crisis, which saw respectively 20 per cent, 30 per cent and 40 per cent declines in US stocks,” the report explains.
“But even in these cases, the decline was fully reversed within 1 to 3 years.”
