Post by account_disabled on Feb 28, 2024 5:53:53 GMT -5
There was a time when investors understood that geopolitics had a real impact on financial volatility and economies. During the Cold War, international tensions developed through a combination of proxy wars and high-stakes diplomacy. As a child in East Jerusalem in the late 1960s, I lived through one of those proxy wars in June 1967. That experience taught me that risk is not the same as volatility: the former carries the possibility of losing everything. The peak of that era came in 1973. The same year that announced the United States' withdrawal from Vietnam also saw the Yom Kippur War and the subsequent oil price crisis. Then, in 1989, the Berlin Wall fell and political scientist Francis Fukuyama declared the “end of history.” Thus began, almost 30 years ago, the widespread belief that globalization represented the intertwining of regional economies and the end of geopolitics that affected investments, except in marginal developing economies. When Russian tanks rolled into Ukraine last year, we had experienced a period of global calm, relative to much of the previous century.
As a result, in my opinion, many investors had forgotten how central geopolitics can be to making investment decisions. There were perhaps three reasons why geopolitics took a back seat in investors' frameworks. First, the euphoria Job Function Email Database that followed the collapse of the Soviet Union incorrectly convinced many that we had entered an era of democratic politics around the world. Many also thought that Western powers had the greatest military power, as demonstrated by the Iraq War earlier this century. Second, there was a false belief that a connected global economy was a new phenomenon, when, in fact, international trade dates back to ancient times. Third, the idea grew that this interconnection would lead to the end of conflict between nations and geopolitical difficulties would no longer have an impact on the economic outlook. Arguably, the seeds of the new era were laid with the “ping-pong diplomacy” of the 1970s and the beginning of China's transformation into the economic superpower it is today.
This created ample opportunities for investors (who overlooked the inevitable growing rivalry between Beijing and Washington). Today, China's recent move to restrict exports of two key metals used for chip manufacturing, due to its trade dispute with the US, reminds us that economics is an extension of politics by other means. That's not to say there aren't opportunities to invest and indeed benefit from the emergence of a new economic landscape. But investors need a specific set of skills to do so. Managers who can navigate current geopolitical risks are best placed to generate stable returns over the long term. Those who do not take such risks into account may not simply experience temporary volatility, but could actually lose all of their clients' money, as those who invested in Russian assets learned the hard way following President Vladimir Putin's decision to invade Ukraine. The challenge for fund managers today is having an instinct for geopolitical risk when, in most cases, they haven't actually experienced it.
As a result, in my opinion, many investors had forgotten how central geopolitics can be to making investment decisions. There were perhaps three reasons why geopolitics took a back seat in investors' frameworks. First, the euphoria Job Function Email Database that followed the collapse of the Soviet Union incorrectly convinced many that we had entered an era of democratic politics around the world. Many also thought that Western powers had the greatest military power, as demonstrated by the Iraq War earlier this century. Second, there was a false belief that a connected global economy was a new phenomenon, when, in fact, international trade dates back to ancient times. Third, the idea grew that this interconnection would lead to the end of conflict between nations and geopolitical difficulties would no longer have an impact on the economic outlook. Arguably, the seeds of the new era were laid with the “ping-pong diplomacy” of the 1970s and the beginning of China's transformation into the economic superpower it is today.
This created ample opportunities for investors (who overlooked the inevitable growing rivalry between Beijing and Washington). Today, China's recent move to restrict exports of two key metals used for chip manufacturing, due to its trade dispute with the US, reminds us that economics is an extension of politics by other means. That's not to say there aren't opportunities to invest and indeed benefit from the emergence of a new economic landscape. But investors need a specific set of skills to do so. Managers who can navigate current geopolitical risks are best placed to generate stable returns over the long term. Those who do not take such risks into account may not simply experience temporary volatility, but could actually lose all of their clients' money, as those who invested in Russian assets learned the hard way following President Vladimir Putin's decision to invade Ukraine. The challenge for fund managers today is having an instinct for geopolitical risk when, in most cases, they haven't actually experienced it.