Investors — in fact, anyone — can be forgiven for getting a headache while hearing or watching news and the parade of geopolitical crises.
As I write this column, bombings are rocking Kabul, Afghanistan’s capital, North Korea has fired new short-range ballistic missiles, the BREXIT fiasco remains unresolved in the United Kingdom, protests continue in Hong Kong, the tensions in the Middle East seem to imply the possibility of war, and the trade dispute continues between the United States and China.
And that’s just the major headlines.
We know that having a truly comprehensive investment portfolio means investing outside the country. However, that brings with it the challenge of identifying which geopolitical crises have the greatest potential for impact, or even whether any impact should be expected.
Currently, given the realities in the Middle East, and trade issues between China and the United States, investors need to factor those tensions into their decisions, according to Jay Nash, Senior Vice-President, Portfolio Manager and Investment Advisor at the London branch of National Bank and a 21-year veteran of the financial sector.
Still — and perhaps surprisingly, — although the markets may seem overly unstable now, current volatility is below historical averages, Nash says, adding that the summer months are generally less volatile. At time of writing, the S&P/TSX Composite is currently at 14.4 times earnings versus a long-term mean level of about 15 times. The S&P 500 is currently showing 17.2 times forward P/E versus a long-term mean of about 16.5 times.
This can lead to examining a portfolio from three different perspectives:
- Asset allocation: referring to total exposure of equities;
- Top down: referring to macro considerations such as Middle East tensions; and
- Bottom up: referring to individual securities
However, this does not necessarily mean that changes to a portfolio have become appropriate and some seeming solutions to the impact of these crises may not be necessary.
