Weekly Market Focus

Geopolitics: To fear or not to fear?

Johan Jooste
Chief Investment Officer,
Bank of Singapore,
Member of OCBC Wealth Panel

Geopolitical events almost always make the news headlines and make investors very nervous – especially during flare-ups, as have recently occurred.

However, how much impact do geopolitical events actually have on markets?

A review of key geopolitical events over the past six decades reveals that geopolitical events tend to cause some initial market gyrations but would fully reverse in weeks and in some cases in months. Very few individual geopolitical events have had a sustained global market impact.

Geopolitics matters only when it induces a growth or oil shock
The only time geopolitics had a more profound impact on markets is when the geopolitics triggered either a growth or oil shock.

The case in point is the 9/11 terrorist attack. When 9/11 occurred, markets initially sold off by about 10 per cent but recovered those losses within a month. However, markets started to fall again when U.S. economy slipped into a broader recession. The recession then might have been triggered by a loss in confidence by the terrorist attacks but there were other underlying factors such as the bursting of the tech bubble and accounting frauds. Another example is the Yom Kippur War of 1973. This war prompted an oil embargo on the US and created a global oil shock that resulted into a global recession (Chart 1).

chart 1

There might be a lot of recent attention on North Korea's missile testing, but even during the 1950 Korean War, global stock markets had a bull run.

Don't need to hold too much cash
There will be more headline-grabbing from geopolitical events. However, this does not mean stock markets are going to fall drastically. The reality is that most investors hold too much cash in anticipation of the geopolitical scenario unravelling into the worst possible outcome. The fact is that geopolitical events usually have only a short-term and limited impact. Investors should stay invested amidst most geopolitical events.

Geopolitics only matter if these events lead to serious interruption to energy supplies or growth shocks, which are historically rare. In all of these cases, stock markets still recover after a few years. If you diversify correctly, you don't need to hold too much cash to hedge against geopolitical risk (Chart 2).

chart 2