Bob Homan: Investors should not get involved in geopolitics

Bob Homan: Investors should not get involved in geopolitics

September 10, 2024

Geopolitics
Bob Homan

This column was originally written in Dutch. This is an English translation.

By Bob Homan, CIO ING Investment Office

I am regularly asked what impact geopolitical developments and deglobalization will have on financial markets and our investment portfolios. That question is not surprising, because there is plenty going on in the world.

When I read interviews with investment strategists and fund managers, they talk about the major influence of geopolitical developments on financial markets. I recognize that influence. When asked what they then do with it in their portfolios, the answer is usually something like “we are very alert to it and ready to intervene. I'm sure that's all well and good, but that usually means they hardly do anything with it. Rightly so, I think. But please say so, and don't pretend that you do do a lot with it and don't suggest that your portfolio is less sensitive to these issues because of your alertness.

In my view, geopolitics and deglobalization should not have a major impact on asset allocation and investments. To start with geopolitics, a war or attack usually comes unexpectedly and the consequences are often poorly predictable. Last year, for example, oil prices peaked just before Oct. 7.

That's why we try not to anticipate geopolitical developments, although of course we don't ignore them entirely. For example, we do take geopolitics into account when weighting energy stocks in our portfolios. Based on supply and demand factors, an underweight of the energy sector would be appropriate now, but with a war in the Middle East that could easily escalate and cause oil prices to rise rapidly, we think we should at least maintain a neutral position.

The theme of deglobalization also plays only a limited role in shaping our portfolios. It may be different for specific stocks, but in general, for companies part of the revenue falls away due to deglobalization or trade wars. At the same time, however, there is also less competition from the other block. At the sector level, not much changes. For example, IT remains an attractive sector in our view, despite significant restrictions on exports to China.

For portfolio management, deglobalization could even be an advantage. Economic cycles may become less synchronous due to deglobalization, and financial markets may follow suit. Thus, regional diversification opportunities increase. So avoiding countries or regions because of geopolitics and deglobalization certainly does not seem wise in that respect.
 

 

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