Geopolitical tensions “rarely impact” equities

AnalyticsKleinwort Benson's Mouhammed Choukeir, chief investment officer, has an interesting take on the geopolitical tension said to be spooking markets.

He points out that the S&P 500 increased in value in the month following the Cuban missile crisis in 1962.

"Geopolitical tensions will undoubtedly create jitters in markets in the short run," he blogs on the Kleinwort Benson website. "... but their impact on medium and longer term performance is likely to be minimal, unless conflicts significantly change the course of market fundamentals."

Financial history teaches that geopolitics rarely impact equity markets over the medium to long term, he says. The data just does not support the "geopolitical tensions are bad for markets" hypothesis.

"For example, the world was brought to within an inch of nuclear Armageddon during the Cuban missile crisis in October 1962 (markets were reasonably flat in the months leading up to the crisis). An investor in the S&P 500 would have been up 7% in the following month, up 16% over the next quarter and up 34% a year later. Khrushchev may have blinked, but investors were on a roll."

So what about today, with crisis in the Middle East and Ukraine?

A huge surge in the price of oil that sparks inflation would be damaging, he says, but this risk is currently low with the price of oil down 5% so far this year even with all the geopolitical tensions in energy sensitive regions.

"The supply shortage in affected regions has been offset by increased production from elsewhere."

However, he adds that Kleinwort Benson has lowered risk in its portfolio. "Medium and long-term performance is driven by fundamentals rather than geopolitical headlines ... For now, none of these conditions are on red alert, though they are flashing amber, hence our reduction to risk since the beginning of the year."

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