Are financial markets too complacent about geopolitical risks?
Financial markets appear to be overlooking any potential volatility from global political and other international developments, according to MJW in commentary attached to its latest survey of fund performances.
Tuesday, July 23rd 2024, 8:55AM 
1 Comment
by Jenny Ruth
“While bond market volatility is above average, it is trending down,” MJW's Ben Trollip said.
“Equity market volatility is not far off 'rock bottom' levels. And all the while we have two major conflicts underway in Ukraine and Gaza,”
His commentary was dated July 18, so before US President Joe Biden decided to withdraw from contention in the November election.
The VIX Index, which measures the volatility of the US stock market, ended July 17 at 14.48 points, compared with over 20 in November last year. It has since risen to 16.52 points on Friday, July 19.
Trollip noted that betting markets had given Donald Trump, the Republican Party's nominee, a 65% chance of winning amid the “disorganised revolt” within the Democratic Party since Biden's poor debate performance three weeks ago.
While Trollip didn't say so, it's notable that Trump didn't appear to suffer from the very high number of lies he told during the same debate. Trollip didn't mention the assassination attempt on Trump either, which some believe boosted his electoral chances.
“However, there are over three months to go and American politics are nothing if not volatile,” he said.
While Biden has nominated vice-president Kamala Harris to be the Democratic nominee, that' is yet to be decided.
He noted similar political turmoil in Europe, particularly in France where the snap election left the governing centrist Ensemble party falling from 42% of the seats in parliament to 2*%, and the British election which saw the Labour Party win 63% of the parliamentary seats with just 34% of the popular vote.
“The potential for a black swan event – an unforeseen risk manifesting in financial markets – would appear to be high,” Trollip said.
His commentary noted that while NZ came out of a technical recession in the March quarter, adjusting for population growth, the 18-month change in GDP fell from negative 0,5% to negative 4.2%.
“The Economist magazine has calculated New Zealand's GDP per person, adjusted for price differences, as US$54,100. This trails Britain, US$58,900, Australia, US$69,100 and the US, US$81,700, and perhaps goes some way to explaining our emigration flows which have been steadily increasing since mid-2021.”
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The return to unpredictable markets is exactly what investment professionals should be preparing their clients for, along with the benefits of diversification amongst low correlated assets and the preference for sure-footed investment as opposed to a shotgun approach.
Risk management should be back on everyone's agenda.