The Global Environment Becomes More Volatile Than It Was Back in the Vietnam War
Geopolitical threats have been making their way back into the national markets. Lately, the world was flooded by several headlines regarding the affairs in North Korea and Qatar, and there are emerging uncertainties regarding the status of U.S.-Russia connections.
Geopolitical risk indicators are currently at spiked levels relevant to the last century, based on a chart shown by Bernstein Energy and Power group managed by Oswald Clint, referencing data from the Federal Reserve Board. These figures aren’t on par with the former WWI and WWII or 9/11 and the 2003 Iraq invasion. Still, there are more increased levels noted than those back in the Vietnam War and forward to the 6-day War.
Geopolitical volatility and oil markets have been interconnected in the past. Arguments and disagreements force oil generation to go offsite, which later fuels the spike in oil prices. Over the last two years, though, there has been no notable rise in oil prices, despite heightened geopolitical threats through the oil supply axis.
Clint stated that while a small number of these affairs have contributed to an increase of oil prices over the last 12-month period, that is the act of expanded inventories. He further added that once the run short, a heightened price instability may reemerge.
In this angle, he elaborated, it is beneficial to realize that when the current geopolitical threats concerning the last 100 years are considered, the risk is elevated. Additionally, as he noted, a kind of geopolitical unavailability thereafter seems more probable than not to take place and that could spell good news for oil prices.
Even though geopolitical threats have been connected to oil prices, the past has demonstrated repeatedly that geopolitical panics on their own, rarely bear an ongoing impact on markets. After examining findings regarding key geopolitical events in the last century and beyond, Giles Keating, ex-head of research & deputy global CIO of Credit Suisse Group, has noted that stocks overall recovered following such geopolitical shocks.
As he noted to one of his clients, the vast majority of separated key affairs starting from the assassination of Archduke Franz Ferdinand around a century ago to 9/11 incident and recent situations in Iraq and Crimea, influence primary stock markets by approx. 10% or less, with this impact completely turned around within a month. He added that this implies that the most fruitful approach has typically been the oppositional one of purchasing into price declined triggered by such events.
As an illustration of this in action, a Credit Suisse research group driven by Andrew Garthwaite in 2017, showed a chart depicting what Hang Seng appeared to be in the near and long-term future, following the Tiananmen Square protests in 1989.
The group stated that, in their experience, markets show a tendency to over-respond to political upsets, as in the case of Tiananmen Square where the Hang Seng index had dropped by 22% in just one day, with losses of 37% over the completion of the protest duration, before gradually rising back to the former peaks noted the year after.
In reality, there were numerous instances where markets didn’t resume as fast, following shaky geopolitical incidents such as the 1940 France Invasion and Yom Kippur Warm which triggered a total re-establishment of control over international oil.
Specifically, Warren Buffet also favors the keep-calm when disaster strikes approach. At the edge of the financial recession in October 2008, he expressed in his New York Times article that long-term stock market expectations will be positive. He added that towards the 20th century, the U.S. has suffered from two world wars and other shocking and costly military battles, the great recession, and several other economic shocks and incidents as well as oil panics, a flu outburst, and the resignation of a dishonored president.
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