Institutional investors must place more importance on political risks, according to geopolitical and financial experts who spoke June 12 at the International Pension Conference of Montréal.
Lisa Emsbo-Mattingly, Director of Asset Allocation Research at Fidelity Investments, believes the appetite for globalization has peaked and investors may be ignoring the risks ahead.
Political uncertainty and market volatility
"Market volatility has remained low despite the significant increase in political risk over the past two years," said Emsbo-Mattingly. "In fact, the gap between political uncertainty and market volatility is the widest it has been since 2000."
Philip Stevens, Chief Political Commentator for the Financial Times, says three major trends will shape the world in the coming years: a continued decline in the United States' global influence, China's determination to become a superpower via closer ties with Europe, and the rise of populism in developed markets.
"We are moving into a multipolar world where the United States' power is in relative decline which will lead to a more unstable environment," said Marko Papic, Senior Vice President, Geopolitical Strategy at BCA Research. "Already the number of conflicts occurring today in the world is already the highest it has been since 2010."
Global wave of populism
Paul Podolsky, Partner with Bridgewater Associates, expressed concern with the global wave of populism and the tremendous liquidity in markets, something that has not occurred since the late 1920s, when these trends led to unexpected changes in policy.
In a challenging investment environment with low inflation, low interest rates and high asset values, Henri-Paul Rousseau, Vice-Chairman, Power Corporation of Canada and Power Financial Corporation, said it would be a mistake not to take geopolitical risks into account when considering future investments. "While markets have historically been resilient to political shocks, it might no longer be the case in the current environment where geopolitical risks might have a greater impact on investment returns than in the past," he said.