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Here's how geopolitical tensions impact the portfolios of HNIs

Share Written By
Bhavesh Sanghvi

CEO Emkay Wealth Management

11 Mar 2019

Investment portfolios are impacted, time and again, by developments within and outside the country, and geopolitical tensions do have a bearing on portfolio value and portfolio preferences. This is due to the fact that the effects of events, irrespective of geography, get transmitted through trade and currency to even to far flung geographies.

Though the effect of these events is often short-lived and fades away as soon as the event is over, it is important that one needs to comprehend the matter that one is not operating in an insulated environment but in an open area fraught with risks of differing natures.

The world today has a long string of such tension hit areas like the Korean Peninsula, the Middle East, Venezuela, etc. Many of these tensions involve political and economic factors, and several major powers and also minor entities, who are all actors on this stage of perpetual and serial conflicts. More than anything else, it is the threat perceptions or potential damages which are counted in such situations, even when the actual damages could be often very limited.

In response to the US sanctions on Iran, they have warned the US that they are capable of disrupting the oil supply through the Straits of Hormuz, which is crucial gateway for movement of almost 45 percent of crude supplies, to the rest of the world. This has a potential to push the crude prices higher, which has, in fact, moved up from the recent lows of $58 a barrel to $ 66 a barrel.

This rise in crude prices in most cases pushes up domestic price levels along with falling local currency with grave implications for domestic price levels, and therefore, interest rates, thereby resulting in lower valuations on both equity and debt portfolios.

The present case is Venezuela, and though most of the crude it exports are now rerouted through other countries and other means, ultimately it will be of some consequence to the global economy in the form of a kind of supply disruption.

Volatility in emerging markets has been conspicuously the result of currency movements in the recent times, emerging market currencies depreciated by 8 percent to 20 percent, and this was occasioned by a surging US Dollar, exit by foreign investors from local markets etc.

When these currencies depreciate against the US Dollar, overseas investors usually exit in the face of an unstable currency, which further accentuates the problem. Business is done only in generally stable currency conditions.

There are a few lessons learnt from developments around emerging markets in the last one decade or so. The most valuable experience is that pays to be in US Dollars or US dollar denominated assets in times of uncertainties as the dollar still enjoys safe haven status among the currency majors.

Critical periods of crises witnessed investors taking shelter in US dollars. This also indirectly challenges any disproportionately high exposures to smaller regional markets which may be impacted by currency movements in a major way.

Diversification by sector and diversification by instrument of origin are important for any portfolio to withstand any consequences of geopolitical tensions. The key to surviving geopolitical tests is to be positioned in instruments that are insulated from extraordinary gyrations in value when events spread their tentacles through the after effects.