Geo­pol­it­ics is an essen­tial input for port­fo­lios

Nathan Sheets (“Investors shouldn’t tear up their play­books over geo­pol­it­ical risks”, Opin­ion, May 16) takes a very nar­row defin­i­tion of geo­pol­it­ics and con­cludes investors need not upend their port­fo­lios for unquan­ti­fi­able, short­lived event risks.

In our view, this defin­i­tional fram­ing can miss both great oppor­tun­it­ies and risks arising from a chan­ging world. Geo­pol­it­ics is not to be meas­ured in news cycles of wars and viol­ence, but in an ana­lysis of how geo­pol­it­ical forces affect macro dynam­ics of growth and infla­tion as well as micro drivers of returns in regions, sec­tors and indus­tries. A simple example would be the impact of recent and future trade and indus­trial policy responses to a frag­ment­ing world.

Using this prism, geo­pol­it­ics is an essen­tial input into the port­fo­lio con­struc­tion pro­cess, with the object­ive of identi­fy­ing the trans­mis­sion mech­an­ism from news head­lines to policy, to the real eco­nomy and ulti­mately, to fin­an­cial mar­kets. Such an approach also enables investors to eval­u­ate whether cur­rent mar­ket pri­cing adequately reflects risks or not.

Elliot Hentov
Head of Macro Policy Research, State Street Global Advisors, Lon­don E14, UK