We are always being asked to predict the future so our clients can invest with absolute certainty. Unfortunately, our crystal ball is not that shiny and although we can identify trends and major issues, they will not always translate into direct market outcomes.
The markets are always full of noise and scare mongering but geopolitical issues are often overlooked. Bill O’Grady from Confluence Investment Management has identified five key issues that can definitely influence the market. If these issues rise in prominence then they will tend to depress share prices and increase the value of the US dollar. Bill O’Grady lists these issues in order of importance:
• The rise of populism:
Rising middle class discontent with their economic situation causes a surge in populism. This is manifested in events like Brexit and the rise of Donald Trump as a US Presidential candidate. Rising populism can lead to a leaderless world characterised by regional trading blocs.
• The US elections:
Uncertainty and unease with both US presidential candidates may see major foreign powers such as China and Russia trying to sway the election to support Trump. This could result in rising political instability which causes investors to move their money elsewhere.
• The South China Sea:
China is building islands and airstrips in the South China Sea as it rapidly moves to cement its growing power in that region. The US has responded by sending its warships into the area. This has increased tensions in the area and the potential for a geopolitical ‘accident’ is rising.
• Lone wolf Islamic terrorism:
Islamic State is losing territory so in an attempt to prove it still matters, it is trying to inspire an increasing number of lone wolf type terrorist attacks. Unfortunately, it is almost impossible for law enforcement and intelligence agencies to contain these lone wolf type attacks without severely impacting upon civil liberties.
• The new oil world:
As oil prices fall and appear to stabilise at new low levels, a number of oil-producing nations whose economies were built upon sustainably high oil prices may face civil unrest and the potential for sudden changes in government.
Who knows how powerful these issues will become over the coming months but it is inevitable that they will have some impact. Getting out of the markets and sitting in cash is not a viable plan if saving for the medium to long term. One of the primary ways to be in the investment markets and not take excessive risk is to follow the principle of diversification, diversification and diversification.