What investors need to know about ‘geopolitical risk’2 min read . Updated: 04 Apr 2021, 01:05 PM IST
- A change in the political landscape can send markets into turmoil
Investment professionals often talk about geopolitical risk. For those new to investing, the term can be unclear.
For U.S. investors, geopolitical risk typically refers to the added problems and opportunities that come with investing in foreign markets.
In less-developed nations, for example, a change in the political landscape can send markets into turmoil, says Marc Chandler, chief market strategist at New York-based currency broker Bannockburn Global Forex. For instance, in March, a Brazilian high-court judge quashed prior corruption convictions of former Brazilian President Lula da Silva, opening the way for Mr. da Silva to run in next year’s election. Markets reacted quickly and negatively to the news, leading to selloffs of the Brazilian currency, the real, and the bond market.
Political changes usually don’t spark those kinds of reactions in developed countries such as the U.S. or Japan or in Western Europe, where “there is a greater sense of certainty," Mr. Chandler says. In 2017, it took the Netherlands 225 days to form a government. “In a less developed country, such a long wait for a government would have a toll on the markets," he says.
Not everything involving geopolitics is short-term. Sometimes analysts focus on identifying longer-term or secular changes in how countries interact with each other to determine where and how the world economy will grow.
In 2017, the U.S. dubbed China a strategic competitor, partly because of China’s lead in the 5G wireless-technology race, says Peter Tchir, head of macro strategy at New York-based Academy Securities. “Here we are competing with China, and Chinese tech giant Huawei is the leader," Mr. Tchir says.
Academy says a team of retired admirals and generals who help give it insight on geopolitical risks also highlighted that a major portion of the U.S. military’s antibiotics are sourced from China, as are minerals required for defense equipment.
Academy predicted that the Biden administration would take steps to rectify that. “We were convinced that we would see efforts to bring back more production" to the U.S., Mr. Tchir says. The firm also predicted some strategic spending, as well. “I think you are going to see stimulus proposals to see 5G Wi-Fi in cities in the U.S.," he says.
For the investor, that means U.S. tech companies with 5G know-how could benefit. “There is a real potential for growth, and we are just trying to get our head around that," says Mr. Tchir.
This story has been published from a wire agency feed without modifications to the text.