Geopolitics can significantly determine investment return outcomes, making it vital that investors keep abreast of the latest geopolitical news.
Geopolitics can be defined as a political influence on international relations and diplomacies, such as military engagement and war, trade wars, populism, terrorism and climate change policy.
Recent examples include China's political relationship with Australia as it affects trade between the two nations. Similarly, China's relationship with the US is a significant geopolitical risk, implications for developed and emerging markets and world trade.
How geopolitics impacts investors
Investors must make decisions in an ever-changing world rife with geopolitical risks. The coronavirus pandemic and the response by governments across the globe is a current example of geopolitical risk for investors. The answer to the virus is likely to dominate geopolitics for years to come.
Geopolitical risk contributes to financial uncertainty and volatility and can give rise to economic nativism, meaning companies may operate in markets that may be unreceptive to globalisation, which supports supply chains, financing and capital.
Geopolitics may distort traditional economic models used to guide long-term investment decisions and capital allocation, contributing to uncertainty for individual investors and markets.
Geopolitical risk
Geopolitical risk can refer to a wide range of issues, from military conflict to climate change and coronavirus to China's Belt and Road Initiative. Here at ausbiz, we speak with analysts to view the relationships between nations at a political, economic or military level. They break down the latest geopolitical news and risks when testing normal relationships between countries or regions.
Geopolitical risk creates uncertainty. This affects economic decisions and financial markets, with policy-makers having to re-evaluate making significant commitments.
Companies can delay investment decisions or think twice about committing to expanding their workforce. Consumers can wait to spend on items such as cars or houses. Financial investors may balk at buying or selling based on the geopolitical news and how analysts interpret it.
Geopolitics impacts markets
Geopolitical risks can prompt investors to shy away from riskier assets such as shares and reposition their portfolios towards perceived safe assets, like fixed interest assets. This can negatively impact sharemarket returns, while government treasuries are likely to benefit, particularly those with shorter maturities because they are regarded as the safest.
Geographically, investors may also move their money away from riskier regions or countries experiencing political, social or economic upheaval. This may see investors reposition themselves away from emerging markets and towards developed markets such as the US or Australia.
Geopolitics on ausbiz
Geopolitics constantly moves the markets, and with risks rising amid the coronavirus pandemic, now more than ever is the time to keep informed. Here at ausbiz, we make sense of all the jargon and break down what it means for investment strategy.
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