Investing amid Geopolitical Change

We’re living in ‘interesting times’ as the Chinese curse is said to have wished. China is steadily flexing its growing power and Russia’s shrewdly successful global chess game has become more visible. Both are led by effectively ‘Presidents for life’ with longer timeframes than the west, unfettered by democratic values. Meanwhile Trump strikes unpredictable deals with foes, disparages allies and Europe copes with growing instability, making Brexit the least of their worries.

Out of all this, investment markets worry most about the risk of global trade war. The rules-based global order that took many decades to create is being ‘trumpled’ on. That shared international conduct on agreed international laws and regional security post WW2 is no longer reliable as this Asian century unfolds with our now capricious US ally. That orderly behaviour underpinned expanding global trade. But capitalism may have swung too far and Jo Citizen now feels insecure with a growing wealth gap and unreliable employment.

Two views on trade

Regarding US trade, some say Trump’s tariffs are minor but he may trigger a tragically downward trade spiral, threatening globalisation success. Others are more strident, wanting to protect US intellectual property theft and tackle US trade deficits with China and Europe. For Australia, if a trade war is triggered it could suppress world growth and diminish our investment and job prospects.

So, what is an investor to do with potential for trade war in a climate of rising interest rates? Higher interest rates usually mean lower gold prices, as gold generates no income. But on the other hand, any unravelling on trade breeds uncertainty where gold is more comforting. If we were cats, we might say ‘when in doubt, wash’… (we often see this behaviour in cats)… the human equivalent is… ‘if in doubt, do nothing’.

What about gold?

While gold might be part of an overall allocation, it does not displace a diversified portfolio.

Gold prices have underperformed inflation since 1980 with no income, while incurring secure storage costs. Along the way, its price has been more volatile than the stock market. So shares are less likely to make you sleepless than gold and also generate returns many times higher. A diversified portfolio uses whatever mix of shares, property and interest bearing assets best suits you.

What does it all mean?

Geopolitical events are usually best ignored as their effect tends to pass with time. History suggests that if you rush to cash at every looming threat, you lose more in rejected returns than you save. If you reflect on geopolitical crises over the years, most of them have no lasting effect on the international invetment market. To mention a few… there’s Brexit in 2016, US Fed Interest rate hike of 2015, the rise of ISIS in 2014, Boston Bombing in 2013, US Fiscal cliff in 2012, US Debt ceiling crisis in 2011, Gulf Oil spill in 2010 and the sub-prime GFC of 2007/8. The GFC shows that ‘doing nothing’ can be wrong some of the time but it’s an approach that usually pans out over time. The really major crises where it was best to ‘do something’ have typically been about 40 years apart. Of course this timescale may not be repeated but it does provide perspective.

The other two Chinese curses…

We opened using the Chinese curse; ‘May you live in interesting times’, which really means… expect trouble.

The others are: ‘May you be recognized by people in high places’… but recognition can bring trouble; and ‘May you get what you wish for’… or, be careful what you wish for.

Depending on your mindset, blessings may become a curse. And similarly with current instability… it’s probably best to stick to your path and keep your head down. That is, do nothing and let it pass.

We believe in a higher standard of financial advice, free from product bias and conflicts of interest.


Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.