How to survive the geopolitical storm

The picture today

The outlook in many parts of the world appears grim right now. There has been escalating confrontation in Ukraine, the brutal slaughter in Syria and Iraq shows no sign of slackening and in countries such as Egypt and Libya the Arab Spring has given way to continuing upheaval.

Europe is on the brink of slipping into recession, with all the political problems that could entail; in the Far East, China continues to resist demands for greater democracy by its citizens in Hong Kong.

Investors’ response to a heightening of global tension has traditionally been to buy “safe-haven” assets such as gold, while flare-ups in the Middle East have tended to push the price of oil higher. There has been some evidence of a move into these commodities this summer, with ETF Securities, the exchange-traded fund specialist, reporting seven successive weeks of money flowing into exchange-traded products (ETPs) tracking the price of gold and oil. However, these flows have been modest and gold and oil prices have barely moved, despite all the bad news from Iraq, Syria and Ukraine.

Meanwhile, as Guy Foster of Brewin Dolphin observes, sanctions against Russia for its actions in Ukraine are having an effect, with the Russian stock market falling by more than 12 per cent since late June. In addition, some non-Russian stocks, such as BP, have seen their share price hit as investors weigh up the impact of sanctions on Russian oil companies such as Rosneft, in which BP has a 20 per cent stake.

At the same time, Russian sanctions — and the threat of further sanctions — have hit European economies and left their stock markets looking even more fragile than before.

A sign of how seriously investors view the situation in Ukraine is that when ceasefire proposals were announced on Wednesday, shares soared on stock markets across Europe.

Continuing political themes

The long-running conflict in the Middle East, which has, in recent years, touched virtually every state in the region at some point, means there is a continuing concern about oil prices, says Caspar Rock, chief investment officer at Architas, the fund management division of AXA Wealth. He says: “There is an ongoing worry about potential restrictions in the supply of oil and its impact on energy prices. Higher prices act as a kind of tax on global growth, so fund managers keep a close eye on what’s happening in the Middle East.”

Mr Foster believes that the tensions between Russia and the West over Ukraine represent more than a passing flare-up and show signs of becoming a more permanent confrontation that could harm the prospects of both power blocs. He says: “We have reduced our European equity holdings and we have zero in Russia.”

Richard Philbin, chief investment officer of Harwood, the multimanager fund group, says that the growing importance of China will continue to play a key role in world markets, both for good and ill. He says: “On the plus side, China appears to be taking the need to reform seriously, trying to reduce corruption and becoming much more focused on how it allocates its capital. In other words, it is going to stop building roads to nowhere.

“On the other hand, as it creates more welfare provision for its people, their huge mountain of savings for a rainy day could shrink significantly, which would have major global implications, since Chinese savings finance a large chunk of western debt.”

Closer to home, Mr Foster forecasts that there could be a wobble in the currency and the stock market if Scotland votes for independence this month (see pages 56 and 57).

He says: “The market is pricing in a ‘No’ vote so a ‘Yes’ vote could have an impact on the pound and on UK shares.” Mr Rock adds that uncertainty about a possible shared currency and how the UK’s debts would be divided up

would mean that government bonds would carry a higher risk premium.

The opportunities

Markets tend to get very cheap when there are huge amounts of political uncertainty, and this can provide opportunities for investors with strong nerves.

The Iraqi invasion of Kuwait in 1990 plunged the world into turmoil, as people feared that the whole Middle East could be set ablaze.

The same fears were present in March 2003, on the eve of the Iraq war. Yet on both occasions investors who put money into the stock market at this apparently inauspicious time were handsomely rewarded over the following years.

As Mr Philbin says: “It bears out the Warren Buffett [right], axiom that investors should be fearful when others are greedy and greedy when others are fearful.”

However, there are exceptions to the rule. Anyone who decided to invest in the stock market in the turmoil following the 9/11 attacks on New York and Washington would have lost money as shares continued falling for another 18 months.

The FTSE 100 index stood at about 5,000 in the wake of 9/11 and after falling below 3,500 in March 2003 it wasn’t until 2005 that it once again reached the 5,000 level.

A key point to remember is that although political crises can affect markets in the short term, economic fundamentals tend to reassert themselves in the long term.

As Mouhammed Choukeir, chief investment officer of Kleinwort Benson, the wealth manager, tells Times Money: “We have analysed 16 serious geopolitical crises since 1950, and in only four cases was the S&P index of US stocks lower a month later.

“Geopolitical tensions will, undoubtedly, create jitters in markets in the short run, but their impact on medium and longer-term performance is likely to be minimal.”

Funds to survive the political storm

Cautious investors

Tim Cockerill, of Rowan Dartington, the stockbroker, suggests cautious investors could take a look at Henderson UK Absolute Return fund. “It operates a ‘long/short’ strategy, meaning it can make money from both falling and rising markets. It aims to generate steady returns year by year with a low level of risk.”

Iain Scouller, of Oriel Securities, selects RIT Capital Partners investment trust for cautious investors. “It has a much wider spread of investments than most trusts, so in addition to shares, it holds bonds, property, hedge funds and private equity. This fund is used by the Rothschild family, so there is a strong emphasis on wealth preservation.”

Medium-risk investors

Mr Cockerill points to GLG Undervalued Assets fund. “The manager has a strong focus on valuation. He will not overpay for stocks, which is especially useful when markets are at, or close to, their highs.”

Mr Scouller suggests medium-risk investors could try Foreign & Colonial investment trust. “It has successfully weathered two world wars and numerous booms and busts since its launch in 1868, and performance has been quite good.”

Adventurous investors

Mr Cockerill’s adventurous choice is Threadneedle UK Extended Alpha fund. “This is another fund that operates a long/short strategy and means the manager can take positions against stocks he does not like, as well as backing stocks he likes. Chris Kinder, as the manager, is part of a very capable team.”

Mr Scouller picks out Murray International investment trust. He says: “Bruce Stout, the manager, has been adept at reading the market well.

“He takes care to select stocks which are good value, and investors benefit from a yield of 3.8 per cent.”