The temptation to pick up the phone to your wealth manager when the international environment is turbulent is a strong one. Military conflict is unnerving. Shock elections results are unsettling. Soaring energy costs make everyone feel poorer. Making sure you are protected against these storms is understandable and intelligent investing should do exactly that.
A certain level of volatility is unavoidable and an investment portfolio will always be affected by political and economic headwinds that influence its value. But competent financial advice can ensure you have the best strategy in place to protect yourself. Diversification and long-term thinking are two key pillars of quality wealth management. If you spread your risk around, you are less likely to be affected by specific events and if the fundamentals of your portfolio are sound, you can be confident it is resilient. These foundations can defend your wealth against all kinds of uncertainty.
Equipped with the understanding that investment portfolios will always be affected by, and ideally protected against, international events, it is easier to stay calm when things seem chaotic. It’s useful to see it as business as usual. Investors from the United Kingdom or the United States are likely to feel comfortable with a large part of their portfolio oriented toward their home markets. Developed economies with strong legal protections like the UK and the US attract large amounts of capital from all over the globe and, despite their noisy politics, are seen as good places to invest. Concentrating your portfolio in the place you know best is a reassuring strategy. But investing close to home does not insulate you from overseas volatility.
The global economy
The modern economy is interconnected and assets in one market can be affected by events in another. Energy is an obvious example. The oil and gas markets are international and, while some countries have domestic production, many countries still rely on global supplies. Energy is essential in all spheres and prices on global markets can affect the financial fortunes of companies and governments everywhere. Whether your portfolio is invested in UK government bonds or the S&P 500, the price of energy internationally matters.
Disruptions in international supply chains are another risk factor affecting your domestic investments. When the Chinese economy seized up due to Covid-19, the world felt it. Globalised production has pushed down costs for large western corporations so when their costs rise, your portfolio can suffer. If a US motor manufacturer suddenly can’t get parts from its Shanghai supplier, it may have to pay over the odds to source them from elsewhere. Or if shipping costs rise due to high demand, companies will have to pick up the tab.
The effects of conflict or elections also tend to spill out beyond their borders. The London Stock Exchange (LSE) hosts many companies that make money in foreign markets. The LSE is a well-known destination for the listing of international commodities companies, so when problems flare up in Eastern Europe or resource-rich parts of Africa, those invested in London-listed shares will not be immune. In the United States, exchanges like the Nasdaq host some of the world’s largest international technology companies, including many from China. Geopolitical friction between the world’s two largest economies can affect these assets.
Taking the direct route
Some investors may choose to invest directly into foreign markets, arguably exposing themselves more directly to disruption overseas. If someone has strong connections to Hong Kong or the Middle East, they may want to allocate some of their capital to those areas, maybe through the local stock exchanges, private equity funds or property. A wealth manager can advise on how to achieve these goals, but it is always important to understand the risks of the jurisdiction in which you are allocating your capital. Discussing your priorities with your adviser can make sure you understand how your wealth is being deployed.
The linkages between an investment portfolio and the international environment are wide and varied. You may have exposure to global events through investments in your domestic market or you may have more direct involvement through the ownership of assets overseas. Whatever your situation, a well-balanced portfolio can defend against the turmoil of elections, military conflict, energy price spikes or supply chain disruption. Spreading your risk and taking a long-term view means you can lower the chances of getting caught out by black swan events.
At London & Capital, we like our clients to have peace of mind around their finances and take pride in protecting your wealth from all eventualities.
