Putting Geopolitical Risk in PerspectiveSubmitted by ClearBridge Wealth Management on February 24th, 2022
February 23, 2022
For long-term investors, facing periods of geopolitical risk is unavoidable. That does not mean they cannot create undue stress and uncertainty as well as market volatility.
Headlines on regional and global conflicts can be alarming since they are unlike the typical flow of business and market news. These events are also difficult to analyze and their outcomes often challenging to predict. Of course, this doesn't stop many short-term traders from talking about "buying the invasion," betting on oil prices, and trying to time the market, nor does it stop market strategists from making bold predictions on how the S&P 500 might react. However, in these situations, history suggests it is often better to hold a properly diversified portfolio and stay level-headed than to try to guess what happens next. How can long-term investors stay calm in the face of geopolitical conflicts today?
Recent events concerning Russia and Ukraine are troubling but still evolving. On the surface, Russia is seeking to assert its claim to the Russian-controlled regions of Donetsk and Luhansk, with their forces now entering the region after weeks of build-up and intelligence warnings. Like the 2014 annexation of the Crimean Peninsula by Russia, these moves violate the sovereignty of Ukraine. The U.S., Europe and NATO allies have responded with plans for sanctions and their own military action, and Germany has also placed approval of the Nord Stream 2 pipeline, which would carry Russian natural gas, on hold. In reality, the true motivation for Russia goes well beyond these two statelets and involves decades of tensions since the end of the Cold War.
The current situation adds to the many geopolitical crises this century that have been intertwined with business cycles. These include: the attacks on September 11, the war in Iraq, the so-called Arab Spring, Russia's annexation of Crimea, periodic North Korean missile crises, tensions between China and the U.S., the U.S.'s exit from Afghanistan last year, and many more. While each of these episodes is geopolitically impactful, especially when there are humanitarian consequences, it does not mean there will be long-term implications for prudent investors.
This is because, while markets may react to a variety of news on a daily and weekly basis, what drives portfolios over years and decades is quite different. Over longer periods of time, slow and steady economic growth, corporate performance, and valuations matter much more. This was true during the conflicts mentioned above as well as in the decades following World War II and during the Cold War when there were several long bull markets. We continue to believe that the same will hold true regarding the events transpiring today in the Ukraine.
As always do not hesitate to give us a call if you have any questions or concerns.