Navigating Geopolitical Events

Recent conflict between Russia and Ukraine is an important reminder that geopolitical risk is a part of investing in global markets. Navigating geopolitical events requires significant consideration and a sound investment strategy that will serve as an “all weather” approach.

Global Developments and Their Impact

Geopolitical events like military or economic conflicts can affect stock markets in many ways. These events are generally widely followed by investors. We believe current market prices quickly incorporate expectations about the effects of these events on economies and companies. Our investment approach centers on using information in current market prices rather than trying to outguess them. If markets stay open and continue to function normally, we generally continue investing our portfolios according to our usual process. We believe that the most effective way to mitigate the risk of unexpected events is through broad diversification and a flexible investment process. This philosophy applies to other crises, like natural disasters, social unrest, and pandemics.

However, geopolitical events may sometimes lead to restrictions on investors’ ability to trade in specific stocks or on certain exchanges. One way is through government sanctions. In recent days, the US and other Western governments have stated they would impose new sanctions on Russia. The exact nature of these sanctions and extent to which they would impact listed securities are uncertain. If imposed, they would add to sanctions on Russia that have been in place for a number of years.

In another recent example, the US issued executive orders in 2020 and 2021 that prohibited US persons from investing in certain Chinese companies. Like the ongoing situation in Russia and Ukraine, this period was marked by uncertainty. For weeks and months after the original order took effect in November 2020, fund managers sought clarity on the scope of the restrictions and the exact list of sanctioned stocks.

In some cases, geopolitical events have led to market closures, impacting all stocks in a certain market for a period of time. For example, on June 27, 2015, Greece closed its stock market after defaulting on its government debt. The Athens Stock Exchange stayed closed until August 3 of that year. During the Egyptian revolution of 2011, the Egyptian Stock Exchange closed after January 27 and remained closed for over a month. Unplanned market closures are not limited to emerging markets. In 2019, the Tokyo Stock Exchange closed for 10 days after Japanese Emperor Akihito abdicated the Chrysanthemum Throne. In 2001, the New York Stock Exchange closed until September 17 after the September 11 attacks on the World Trade Center.

These types of market events are not new, and the form that they take can vary. We’ve seen other examples over the decades including currency repatriation restrictions in Malaysia in 1997, the introduction of capital controls in Argentina in 1999, and a successful coup d’état in Thailand that led to a market closure in 2006.

Planning for the Unexpected

Investors in global equity portfolios inevitably face periods of geopolitical tensions. Sometimes these events lead to restrictions, sanctions, and other types of market disruptions. We cannot predict when these events will occur or exactly what form they will take. However, we can plan for them by managing diversified portfolios and building flexibility into our process. No two events are the same, but common themes are uncertainty and rapid change. Over time, the longer you stay on as an investor, the more you will become acquainted to the inevitable ups and downs of markets due to geopolitical events.

If you would like to discuss these matters in more detail, please don’t hesitate to contact us.