Investment Strategy Commentary: Geopolitics

Geopolitical events often follow a standard blueprint. The event consumes the headlines. Investors show some panic, causing a period of market volatility. And, finally — so long as fundamentals are not broadly impacted — financial markets go back to what they were focusing on prior to the fire alarm. Currently, that’s inflation and the central bank reaction function. Our monthly Perspective Newsletter details broader asset allocation (no changes were made this month); while this short note provides specific thoughts on Russia-Ukraine.

Exhibit 1 shows a number of geopolitical events over the years and how financial markets responded — both in terms of the length and size of the drawdown as well as the period of time it took to regain previous levels. On average the markets lose around 4% and make up those losses in just over a month. The current geopolitical event is occurring at the time of another pressing question for the markets — the timing and scope of Federal Reserve tightening. As such, it’s a bit difficult to disentangle the two — but, overall (driven by both), we’ve seen global (U.S.) equity markets fall by 8.6% (10.5%) at their lowest (January 27) only to rebound by 5.7% (6.6%) — and are currently down 5.2% (7.6%) year-to-date. We view this market weakness as an opportunity — with the global growth story supporting an overweight to risk, specifically in developed equities, high yield and natural resources — even in the face of current uncertainty (though, the markets are never “certain”).


Outlining scenarios and assigning probabilities is always a useful tool with uncertain events such as geopolitical tensions and risks. Below we outline the three most likely scenarios, our best guess at each scenario’s likelihood and the impacts on the fundamental inputs of growth and inflation.