Why investors are ignoring war, terror and turmoil

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#1
September 8, 2014 9:25 am
Why investors are ignoring war, terror and turmoil
Gideon RachmanBy Gideon Rachman

Global political change has done more to create opportunities than to destroy them
Ingram Pinn illustration©Ingram Pinn
At the beginning of the year, I gave a talk about “geopolitical risk” to a big conference of investors. I trotted briskly around the course: Russia, the Middle East, the South China Sea, the eurozone. Afterwards, I was having coffee with one of the other speakers, a celebrated private-equity investor, and asked him how much he thought about geopolitical risk.
“Hardly at all,” he replied. “We look at the companies, the cash flows, the investments themselves.”
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GIDEON RACHMAN
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Since the man I was speaking to is a billionaire, who ended the conversation by offering me a lift to Madrid in his private jet, it would be foolish to dismiss his views. Most of the time, it does make sense for investors to treat the political news as background noise, which is only marginally more relevant than the sports pages.
Events that are tragedies at a human level turn out to be irrelevant for investors. The unfolding war in Syria, which has claimed close to 200,000 lives, has taken place against a background of booming stock markets.
The disconnect between the markets and politics has been particularly stark recently. Last week, even as the newspapers were filled with stories about war in Ukraine and the Middle East – as well as the possible break-up of the UK – the FTSE 100 hit a new 14-year high. The previous week, the US S&P 500 broke 2,000 for the first time.
The standard response to all this from a political commentator would be to tut-tut about the short-sightedness of investors. But there is another possibility. Maybe the markets are right. Of course, from time to time, a political shock will cause stocks to fall – for a while. But recent experience suggests that the recovery is often surprisingly rapid.
In the first week of trading after the terror attacks of September 11, the Dow Jones fell 14 per cent. But the Dow and the Nasdaq recovered their pre-9/11 levels within months of the attacks.
It has been a long time since international politics really transformed the outlook for investors for years – rather than for weeks or months. The last times I can think of were the oil shocks of the 1970s that followed the Arab-Israeli war of 1973 and the Iranian revolution of 1979.
Since then, the world has been characterised less by geopolitical risk than by the much less often cited idea of geopolitical opportunity. It was the political changes brought about by the end of Maoism that led to the economic transformation of China. Markets opened up for investors in Europe after the fall of the Berlin Wall. The ending of dictatorships in Latin America in the 1980s was also followed by the widespread adoption of more market-friendly policies.
Economics not politics has driven the big shifts in investor sentiment, most notably the bursting of the dotcom bubble in 2000, the financial crisis of 2008 and quantitative easing in the US
So it would be completely wrong to say that global politics has not mattered for investors in recent decades. It is just that political change, on a global level, has done more to create opportunities than to destroy them.
Within that, of course, there are all sorts of political events that can adversely affect the investment climate in particular countries. It is useful to know if a coup or a war is brewing. But the big global shifts in investor sentiment, in recent decades, have been driven by economics, not politics: most notably the bursting of the dotcom bubble in 2000, the financial crisis of 2008 and quantitative easing in the US.
The explanation for current market highs is probably that investors are still much more preoccupied by monetary policy than by wars. But can that attitude survive the current bout of geopolitical turmoil? In the 1970s, war and revolution drove energy prices to levels that shocked western economies into recession. Now, two of the major energy-producing regions of the world – Russia and the Middle East – are in turmoil. And yet the oil price is actually falling.
There are a few reasons why this could be happening. First, the “shale revolution” in the US has made world energy markets less vulnerable to events in the Middle East. Second, the fighting in the Arab world has not yet affected the oil production of Saudi Arabia or the Gulf states.
Nick Butler

Nick Butler
The problem, for companies and for investors, is that oil, gas and coal prices are falling, despite geopolitical risks in Ukraine, Iraq and Libya
Finally, Russia has not yet made serious threats of energy sanctions against the west. If war reached the Gulf, or Russia turned off its energy tap, markets surely would panic.
There is also a bigger and more general political threat that investors may soon have to grapple with. For the past 40 years, political change has broadly pointed in one direction – towards more and more countries joining the global market system, increasing opportunities for trade.
Recently, however, there have been reminders that politics can close markets as well as open them. Japanese firms saw their sales plummet in China, after the rise in Sino-Japanese tensions and have reduced their direct investments in China by 50 per cent this year. Now Russia and the west are engaged in rounds of tit-for-tat sanctions. Unsurprisingly, the Russian stock market is the worst performing big market this year.
However, even investors without a direct stake in Russia, should be paying attention. The Ukraine conflict could still worsen and spread, with unpredictable effects across Europe.
It is also possible that what is happening in Russia is an extreme version of a wider phenomenon – the return of nationalist politics. In different ways that theme can be seen in countries as diverse as China, India, Egypt – and even France and Scotland. Nationalism and international investment tend not to be comfortable bedfellows. Sooner or later, the revival of nationalism could even affect plutocrats in their private jets.
gideon.rachman@ft.com
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#2
Too much liquidity in the mkts nowadays, very hard to crash
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#3
Agree.
After QE & QE & QE how much is your original $5 worth? $5 + $5 + $5 = $15 in the market physically but your original $5 is roughly divided by 3 is the more correctly value as far as you are concerned.

That's why the property market doesn't comes down much either.

That's also why some people think the G's & their central bankers are the "official bank notes counterfeiters" of the world.
i tend to agree.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#4
Last time i heard "politics didn't matter" for a sustained period was Japan in the 90s

For sure i was expecting Syria, Ukraine, Argentina, China slowdown, Eurozone slowdown, dot com burst, Ebola, Iraq, Aussie and UK property bubble, Fed tapering.... One of them to be the catalyst for markets to wind downwards starting August.

So far markets have been extremely resilient. Reminds me of 2007 Summer when Bear Sterns collapsed. Yet market went for final burst of new high in October before realising gravity still exists

Mentality now seemed to be central banks will backstop no matter what. I think this is true for ECB but i doubt it is true for rest of world, either politically or capacity wise
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#5
(14-09-2014, 08:01 PM)Temperament Wrote: Agree.
After QE & QE & QE how much is your original $5 worth? $5 + $5 + $5 = $15 in the market physically but your original $5 is roughly divided by 3 is the more correctly value as far as you are concerned.

That's why the property market doesn't comes down much either.

That's also why some people think the G's & their central bankers are the "official bank notes counterfeiters" of the world.
i tend to agree.

The RICH knows about Inflation Very Well. They take steps to manage their asset, to preserve them and grow them safely. In such system the RICH becomes RICHER.

Just my Diary
corylogics.blogspot.com/


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#6
(15-09-2014, 11:17 AM)corydorus Wrote:
(14-09-2014, 08:01 PM)Temperament Wrote: Agree.
After QE & QE & QE how much is your original $5 worth? $5 + $5 + $5 = $15 in the market physically but your original $5 is roughly divided by 3 is the more correctly value as far as you are concerned.

That's why the property market doesn't comes down much either.

That's also why some people think the G's & their central bankers are the "official bank notes counterfeiters" of the world.
i tend to agree.

The RICH knows about Inflation Very Well. They take steps to manage their asset, to preserve them and grow them safely. In such system the RICH becomes RICHER.
So actually we invest in the equity markets not to become poorer and poorer without even us notice by the day. Fortunate and blessed are those who make a pile from the markets.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#7
(15-09-2014, 12:02 AM)specuvestor Wrote: Last time i heard "politics didn't matter" for a sustained period was Japan in the 90s

For sure i was expecting Syria, Ukraine, Argentina, China slowdown, Eurozone slowdown, dot com burst, Ebola, Iraq, Aussie and UK property bubble, Fed tapering.... One of them to be the catalyst for markets to wind downwards starting August.

So far markets have been extremely resilient. Reminds me of 2007 Summer when Bear Sterns collapsed. Yet market went for final burst of new high in October before realising gravity still exists

Mentality now seemed to be central banks will backstop no matter what. I think this is true for ECB but i doubt it is true for rest of world, either politically or capacity wise

You may be right but now we live in a Globalised World. With a world based on fiat money system and fractional banking system, how can Europe's QE doesn't affect other countries, viz-a-viz?
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#8
These events are always factored into an investor's risk control of the portfolio. It is the cash position that can mitigate unforeseen circumstances whether they are geopolitical risks, or others.
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#9
Hi all,

May I share my small inputs based on logic, feel free for rebuttal.

If everyone was to yanked out within a short period of time, the market will crash again. Hence, this time they play safe by releasing at an extremely slow pace to even out the sudden impacts. There may be possibilities that the big boys are exchanging hands with retail investors to do re-balancing. The govt. intervention is to ensure that there is no sudden tremor being added without ample warnings as well.

Everyone does a part in this challenge.
Reply
#10
If u want anything and everything to go wrong, just focus on the negatives... its not that difficult...

http://www.project-syndicate.org/comment...ical-risks

Markets’ Rational Complacency
NEW YORK – An increasingly obvious paradox has emerged in global financial markets this year. Though geopolitical risks – the Russia-Ukraine conflict, the rise of the Islamic State and growing turmoil across the Middle East, China’s territorial disputes with its neighbors, and now mass protests in Hong Kong and the risk of a crackdown – have multiplied, markets have remained buoyant, if not downright bubbly.
Indeed, oil prices have been falling, not rising. Global stock markets have, overall, reached new highs. And credit markets show low spreads, while long-term bond yields have fallen in most advanced economies.
Yes, financial markets in troubled countries – for example, Russia’s currency, equity, and bond markets – have been negatively affected. But the more generalized contagion to global financial markets that geopolitical tensions typically engender has failed to materialize.
Why the indifference? Are investors too complacent, or is their apparent lack of concern rational, given that the actual economic and financial impact of current geopolitical risks – at least so far – has been modest?
Global markets have not reacted for several reasons. For starters, central banks in advanced economies (the United States, the eurozone, the United Kingdom, and Japan) are holding policy rates near zero, and long-term interest rates have been kept low. This is boosting the prices of other risky assets such as equities and credit.
Second, markets have taken the view that the Russia-Ukraine conflict will remain contained, rather than escalating into a full-scale war. So, though sanctions and counter-sanctions between the West and Russia have increased, they are not causing significant economic and financial damage to the European Union or the US. More important, Russia has not cut off natural-gas supplies to Western Europe, which would be a major shock for gas-dependent EU economies.
Third, the turmoil in the Middle East has not triggered a massive shock to oil supplies and prices like those that occurred in 1973, 1979, or 1990. On the contrary, there is excess capacity in global oil markets. Iraq may be in trouble, but about 90% of its oil is produced in the south, near Basra, which is fully under Shia control, or in the north, under the control of the Kurds. Only about 10% is produced near Mosul, now under the control of the Islamic State.
Finally, the one Middle East conflict that could cause oil prices to spike – a war between Israel and Iran – is a risk that, for now, is contained by ongoing international negotiations with Iran to contain its nuclear program.
So there appear to be good reasons why global markets so far have reacted benignly to today’s geopolitical risks. What could change that?
Several scenarios come to mind. First, the Middle East turmoil could affect global markets if one or more terrorist attack were to occur in Europe or the US – a plausible development, given that several hundred Islamic State jihadists are reported to have European or US passports. Markets tend to disregard the risks of events whose probability is hard to assess but that have a major impact on confidence when they do occur. Thus, a surprise terrorist attack could unnerve global markets.
Second, markets could be incorrect in their assessment that conflicts like that between Russia and Ukraine, or Syria’s civil war, will not escalate or spread. Russian President Vladimir Putin’s foreign policy may become more aggressive in response to challenges to his power at home, while Jordan, Lebanon, and Turkey are all being destabilized by Syria’s ongoing meltdown.
Third, geopolitical and political tensions are more likely to trigger global contagion when a systemic factor shaping the global economy comes into play. For example, the mini-perfect storm that roiled emerging markets earlier this year – even spilling over for a while to advanced economies – occurred when political turbulence in a few countries (Turkey, Thailand, and Argentina) met bad news about Chinese growth. China, with its systemic importance, was the match that ignited a tinderbox of regional and local uncertainty.
Today (or soon), the situation in Hong Kong, together with the news of further weakening in the Chinese economy, could trigger global financial havoc. Or the US Federal Reserve could spark financial contagion by exiting zero rates sooner and faster than markets expect. Or the eurozone could relapse into recession and crisis, reviving the risk of redenomination in the event that the monetary union breaks up. The interaction of any of these global factors with a variety of regional and local sources of geopolitical tension could be dangerously combustible.
So, while global markets arguably have been rationally complacent, financial contagion cannot be ruled out. A century ago, financial markets priced in a very low probability that a major conflict would occur, blissfully ignoring the risks that led to World War I until late in the summer of 1914. Back then, markets were poor at correctly pricing low-probability, high-impact tail risks. They still are.
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