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December 19, 2014 at 11:13 AM
Last week’s siege by a gunman on a cafe in Sydney, Australia came as a shock to the world and underscored the fact that even the farthest corners of the globe may not be immune from political risk. And as President Barack Obama authorized further sanctions on Russia last week and looks to open a more friendly relationship with Cuba, the importance of both political and geopolitical risk gained further amplitude, raising their profile as key issues for the investment community to consider in 2015.
“For the better part of this year, most U.S. investors were focused more on the U.S. economy and the Federal Reserve and the interplay between those two, so because of that more inward looking focus, many correspondingly have largely ignored geopolitical risk,” said Michael Cuggino, President and Portfolio Manager of the Permanent Portfolio Family of Funds. “Whether it’s Russia, or the political risk in the Middle East and even in Asia with issues like what’s happening in the South China Sea, investors may have overlooked the risks they represent.”
But now, even as emerging market valuations look attractive, geopolitical risk is a major factor. Here are some views on how investment professionals see that risk panning out in 2015:
Tom Elliott, devere Group:
The increased threat of geopolitical risk will likely translate to increased volatility in the global markets, which is why Tom Elliott, international investment strategist for devere Group in London, advocates a defensive stance to counter it.
“I am favoring developed over emerging stock markets for the beginning of 2015 and sectors that are inherently defensive, like pharmaceuticals, food, retail and other sectors that stand to benefit from lower oil prices,” he said.
His biggest concern going into the new year is Russia, where a fresh round of sanctions could result in fresh rhetoric from president Vladimir Putin, which in turn would have repercussions for the rest of Europe. However, Elliott is also anticipating increased political risk from unexpected quarters, namely the U.K., as voters and investors come to grips with a new political landscape triggered by two nationalist parties that are challenging the traditional status quo enjoyed for decades by the Conservative and Labour parties, and the general elections next spring may well result in either a minority government that seeks allies on a policy-by-policy basis, or another coalition government, neither of which, Elliott said, promise stability.
“People take the threat of political risk in the U.K. too lightly and so it could come as quite an unexpected surprise to many investors,” Elliott said.
Eric Schoenstein, Co-Portfolio Manager of the Jensen Quality Growth Fund
Gepolitical risk has always existed, of course, and even at the beginning of 2014, said Eric Schoenstein, co-portfolio manager of the Jensen Quality Growth Fund, there were issues investors should have perhaps been more concerned about, namely Syria and Ukraine.
