Geopolitics and investing
Market-moving geopolitical events can be unnerving. But investors shouldn’t rush to buy or sell
As MoneyWeek goes to press it looks as though concerns about an imminent invasion of Ukraine by Russia are dimming (see page 8). But at the end of last week, when the US warned that Russia might be just days from acting, markets unsurprisingly took the news badly. Stockmarkets fell and both oil and gold (the classic geopolitical assets) jumped. As an investor, when you see these sorts of headlines and watch these panicky market reactions, it’s easy to feel you should be doing something, or at least taking the story into account when you look at your portfolio.
But the honest answer is that when it comes to geopolitics, the best option for most investors is just to ignore it. There are two reasons for this. One is that history shows that markets get over geopolitical shocks rapidly. As
Mark Hulbert of MarketWatch pointed out recently, a Ned Davis Research study of 28 of the worst political or economic crises in the
60 years to 2001 showed that in more than half of such cases, the US stockmarket had recovered and made gains within six months of the start of the crisis. The second reason is that, even if you knew exactly what was going to happen in a crisis, the market reaction is entirely unpredictable. As Ben Carlson notes on his A Wealth of Common Sense blog, the Dow Jones index rose by 7% a year between the beginning and end of World War II.
Russia might offer value
So is there anything at all you should consider on the investment front? We’ve always said that you should have some gold in your portfolio. As noted above, gold tends to spike during times of high geopolitical tension but that’s not the reason to hold it. We hold it because we like it as a hedge against rising inflation (very few assets are happy with rising inflation, so having some gold at least offers some consolation during such times). So if you don’t already own gold then you should get some – but for diversification, not because you’re worried about this conflict.
If you are looking for potential opportunities arising as a result of this specific situation, then the most obvious trade now is to bet on Russian stocks. If tensions diminish and the threat of sanctions thus diminishes too, you’d expect the Russian market to rally (indeed it already has somewhat). Given that Russia is also a major player in energy, the wider backdrop is supportive. The easiest option for most MoneyWeek readers is probably the JPMorgan Russian Securities (LSE: JRS) investment trust. It’s currently down about 20% on its most recent high (in October last year) and trades at a discount to net asset value of around 11%. The energy sector accounts for almost half of the portfolio and the dividend yield is about 5%.
“You never know how the market will react to a crisis”