“Geopolitics: managing portfolio implications”

For the 2018 Milken Institute Global Conference, CQS Founder and Chief Executive Sir Michael Hintze, wrote a contributed piece about how geopolitically-inspired market volatility can inform the timing of investment decisions.

In an interconnected global economy, portfolio returns are increasingly impacted by geopolitical events, which have consequences that extend far beyond the place where they occur.

Geopolitical risks are poorly understood in financial markets and often mispriced. This is because it doesn’t matter until it matters. The key is to understand the transmission mechanism into the global economy, trade and markets.

Placing such events into context helps price both risk and timing of investment decisions. The challenge is to structure the market ‘noise’ – the plethora of prices, news and events – into useful data sets, information and knowledge. Yet true alpha lies in turning knowledge into insight. This requires ‘imagination’. For imagination to be effective, one needs to understand the context which, when combined with deep analysis, enables the construction of investment strategies.

There are many crosscurrents facing investors today. The major themes we at CQS are monitoring are populism, challenges to the world order, growth, possible disruptors and other emerging issues. Some events may matter a great deal to the world, humanity and our moral compass, yet not impact trade and the economy. We seek to identify events and their transmission mechanisms into markets as we construct portfolios. Many events have incited volatility, exacerbated by changes to market structure. Geopolitical changes are presenting investors both risks and opportunities.

Two such geopolitical developments are China’s Belt & Road Initiative (BRI) and European Union reform…



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