In Focus: Megatrends  

Don't build investment case on geopolitics, advisers warned

Don't build investment case on geopolitics, advisers warned
The Russian ruble has recovered dramatically despite the war and sanctions (Credits: Alexander Nemenov/AFP)

It is impossible to draw a straight line from economic or geopolitical news to an investment outcome and advisers are better placed building a robust valuations-based portfolio, Morningstar Investment Management said, pointing to developments around the war in Ukraine.

Morningstar's global chief investment officer Dan Kemp told FTAdviser signs such as the ruble's dramatic recovery despite the ongoing war and sanctions, indicated how difficult it was to build an investment case on a geopolitical case.

Instead, investors should look at valuations but with multiple possible scenarios in mind. Portfolios should broadly withstand both a global recession and an event such as longer much higher inflation than expected, he said.

"If we think about a reasonable investment horizon valuations are going to be the key driver of returns in most scenarios," he said.

"[But] if you just let yourself be guided by valuation then you tend to get concentrated in a few different areas and that can lead to a portfolio doing poorly in the short-term, which will then harm the prospects over the long-term.

"You have to have a portfolio that is valuation driven but is robust to a range of possible outcomes." 

In a research paper published in March, Morningstar posited the threat of triple R - recession, rising rates, and a loss in real household incomes - was growing but said this should not push investors into immediate action.

Since then, US economic growth unexpectedly contracted in the first quarter amid growing trade imbalances, rising inflation and supply chain disruptions, the FT reported.

US gross domestic product dropped 1.4 per cent on an annualised basis, down dramatically from the 6.9 per cent rise recorded in the fourth quarter of 2021.

Real test

"More people are now concerned about recession and fewer people are concerned about continuous strong inflation," said Kemp. But global recessions do not happen often, he added.

The real test will be what the longer term consequences of the war will be, he said. There is an immediate impact on supply and prices but longer term there will be an effect on security, governments being distracted away from addressing climate change to focus on energy, and food security and political security.

"The frequency of global recessions is low. It sometimes doesn't matter whether you have a technical recession or a transition from what has been a very rapidly growing economy to one that looks like it's slowing down a lot because of that demand destruction.

"There is a better than 50 per cent chance that we are seeing a slowing in the global economy."

But he said from an investment perspective, it was not as much about what was going to happen but what has been priced in and currently a sharp slowdown has not been priced in.