• Wealth Management

The Return of Global Risk

Although markets have remained relatively calm, events overseas could lead to more volatility.

It was nice while it lasted.

The world has been in a period of relative political tranquility for most of the past year that has benefitted global markets. But in just the past few weeks, that dynamic has started to shift.

Recent events in many parts of the world, including Italy, North Korea and Argentina, are leading to economic anxiety that is affecting currency and bond markets. The assortment of issues includes unsustainable debt levels, unpredictable elections, trade skirmishes and sanctions.

It could get worse. The U.S mid-terms may be unsettling for markets. There are also elections coming up in Mexico and Brazil. North Korean relations remain a wild card.

But I’m mostly writing now to reassure: Global economic growth remains strong and I don’t think this flurry of geopolitical events is likely to snowball into the kind of global synchronized downturn that puts developed economies at risk and stock market returns in peril.

Fact is, some of the worst problems are quite unique. Consider these three examples:

  • Italy: Investors are concerned the newly elected populist coalition government could lead to more spending, bigger deficits and a move to austerity that could threaten Italy’s participation in the European Union. I don’t see that outcome and think EU fiscal stimulus will ultimately allow Italy’s economy to grow out of its problems.
  • Turkey: Investors grew fearful as the president has made moves to take over the central bank. The currency sold off and the government aggressively raised rates to defend it. There is risk of a debt squeeze, but Turkey isn’t a big player in global trade.
  • Argentina: Like Turkey, it has had to hike rates to defend its currency and there is risk of a debt squeeze. But its key underlying problem is that it is highly reliant on imports and external financing. It issued a 100-year bond last year.

While each of these situations represents an increase in risk, we don’t currently think they are connected and likely spread too far beyond their own borders. But these situations can change quickly. I suggest investors keep an eye on high yield bonds, which can act as an indicator that stress is spreading.

Bottom line: The uptick in geopolitical risk argues for using active fund managers as opposed to passive exchange traded or regional index funds when investing overseas. I now favor portfolio managers who focus on multinational stocks that can navigate country-level stresses while exploiting global growth.

Ready to invest in what matters to you?