The news these days concerning geopolitics and the global economy is worrisome to investors. The European Union is struggling to figure out how to get its economy growing while dealing with debt-laden countries like Greece and Spain. Russia and the Ukraine are engaged in what appears to be an endless conflict. On our home-front, all eyes are on the Fed as it moves toward raising interest rates. In the US, the administration and Congress are trying to decide how to respond to the brutal ISIS aggression in Iraq and Syria and a growing level of uncertainty and instability around the world.
These issues can be very troubling and understandably cause investors concern. I hear about their concerns in my conversations nearly every day now. Should these developments change the way you invest? Is your wealth positioned to withstand the uncertainty and market volatility these events produce? Or should you just ignore these events, feeling that the investment impact is beyond any reasonable analysis?
I’d like to offer you my perspectives.
It all depends
That is my answer in short. Most importantly, how we respond as investors depends in large part on our analysis of how these events are likely to impact the global economy. For simplicity’s sake, let me limit my analysis to four areas of concern that currently dominate the headlines:
- The debt-crisis in Europe, with the current focus on Greece and Spain
- The Russian economy and Putin’s military invasion in Ukraine
- The impact of the policies of the European Central Bank
- The threat posed by ISIS and conflicts in the Middle-East
Greece and the debt crisis in Europe
I believe that worries about what happens with Greece’s debt and its future position in the European Union may be overinflated, at least as it relates to the global market impact.
Greece is a relatively small economy on the world stage and so the likelihood that it will impact the EU, much less the global economy in any major way, seems to me to be rather limited. That being said, the way the European Union handles the Greek debt situation is important for the precedent it may set.
Spain is a much larger economy and is also struggling with similar debt problems, although their situation is not nearly as bad as it was a couple of years ago. Like Greece, the anti-austerity left-wing party, Podemos, in Spain is gaining popularity and could be a factor in the elections to be held on or before December 20th this year. So the actions the European Union takes with Greece may influence how it deals with Spain’s debt problems.
While the severity of the economic problems faced by Greece are real, the direct impact on the EU, the global economy, or the U.S. economy is not likely to be significant.
Russia and the conflict in Ukraine
Geopolitical events will usually result in a spike in short-term volatility in markets. But unless they have a lasting impact beyond that region on the global economy, it’s unlikely that there will be a lasting impact on global financial markets.
It is my perspective that it is too soon to tell what the longer-term economic impact will be from the conflict in Ukraine. The Russian economy is under intense pressure, exacerbated by sanctions imposed by the West and the collapse in the price of oil. We are watching developments to evaluate the impact on the global economy, especially in Europe.
The European Central Bank
The European Central Bank administers monetary policy for the 28 nations in the European Union in a similar way to how the Fed manages monetary policy in the US. Despite the financial repression of the zero interest rate policy adopted by the Fed, the policy has no doubt contributed to the recovery from the 2008-2009 financial crisis and the expansion of the US economy. The EU is banking on its quantitative easing program to help improve the growth rates of their economies and to stave off deflation.
It has been almost three years since Mario Draghi, the head of the ECB, said that he would do whatever it takes to stimulate growth in the EU and hold the Union together. In the face of growing deflationary pressures and persistent economic weakness, and with interest rates near negative levels, the ECB finally has begun a bond purchase program of $1 trillion Euros in an attempt to stimulate the European economy.
This may not fix their fundamental issues, but it will give them the time to adopt policies they will need to grow their economies and enhance investor confidence. One immediate impact has been to weaken the trade-weighted value of the Euro versus the US dollar which should help revive growth of European multi-nationals, especially relative to their competitors in the US.
What will be the longer-term impact of the actions of the ECB? It’s too early to say, but we are closely watching developments.
Conflicts in the Middle-East
The news reports about terrorist actions of ISIS in Syria and Iraq are extremely disturbing and threaten the already tenuous stability in those regions.
Historically, a rise in tensions in the Middle East has resulted in higher oil prices which can have a negative impact on the global economy. This time the impact has been more than offset by the rising oil production in the US combined with a fall-off in global demand and has resulted in a significant drop in oil prices.
The growing level of instability in more and more countries and the resulting heightened degree of uncertainty may, in time, erode investor confidence and hinder global trade. However, the US is the best positioned of nations to deal with and adapt to changing global tensions and conditions.
Many people today feel a deep sense of unease about whether their investments are positioned to deal with these types of geopolitical and global economic events. So here is my overall perspective for investors to factor into their investment decision-making process.
It is important to remember that most of the things that you fear actually never happen. And most of the things that do happen can be managed and will not normally require a change in a well-constructed long-term investment plan.
At Whitnell we strive to structure our clients’ portfolios in a way so they are positioned to deal with unexpected events and are appropriate for their investment goals. As the market environment changes, we may need to make adjustments to the plan, but, most of the time, major trends in the market tend to persist so that the best policy is to maintain a well thought-out long-term plan.
Geopolitical events do occur occasionally and often result in security prices coming under pressure. These events are for the most part unpredictable and may result in periods of heightened levels of volatility, which can be unsettling, but may also provide opportunities for those with a longer-term perspective.
The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.