Why Geopolitics Is No Reason to Sell: History Says Buy

Geopolitics is on the lips of every investor.

Use of the term in Bloomberg News stories reached the highest last month since the height of the financial crisis in 2008. Bank of America Corp. analysts reckon 11 percent of the world’s population is now affected by conflicts; 86 percent of investors cited geopolitics as the top market risk, according to a survey by the Charlotte, North Carolina-based bank.

Less worried about the impact of Ukraine, Syria and Gaza on returns is Mouhammed Choukeir, who helps manage 5.7 billion pounds ($9.4 billion) as chief investment officer at Kleinwort Benson in London. He argues history is on his side.

“It’s easy to draw the conclusion that one’s asset positioning should be defensive during times of heightened conflict or stress,” Choukeir said in a report this week. “However, financial history teaches a different lesson: geopolitics rarely impact equity markets over the medium to long term.”

Of 16 geopolitical crises since 1950 that Choukeir reviewed, four left the Standard & Poor’s 500 Index lower a year after they began.

Take the Cuban missile crisis in October 1962. An investor in the S&P 500 would have been up 34 percent a year later.

Investing in the index at the start of the 1967 Six-Day War between Israel and its neighbors would have returned 13 percent in the next year; a wager in December 1979 when the Soviet Union invaded Afghanistan would have returned 30 percent in the subsequent 12 months. In the year after the U.S. went into Iraq in 2003, the S&P 500 added 35 percent.

Oil Inflation

That’s not to say conflicts are a buy signal. The Arab-Israeli war of 1973 triggered a 35 percent slump in the U.S. benchmark as an oil embargo spurred inflation. The Sept. 11, 2001, attacks saw investors lose 16 percent in the following year.

To Choukeir, the main reason to worry now is if the tensions spark a run of faster inflation. He sees that risk as low; the price of crude fell 5 percent this year.

“Geopolitical tensions are likely to continue dominating the headlines in the coming months,” he said. “While they will undoubtedly create jitters in markets in the short run, their impact on medium- and longer-term performance is likely to be minimal.”

Before it's here, it's on the Bloomberg Terminal.