Watch out for more geopolitical shocks

07 February 2020

3 minute read

The US presidential election race, globalisation tensions and government-led climate change initiatives mean that 2020 is due more geopolitical shocks, warns Gerald Moser, chief market strategist at Barclays Private Bank.

Key points:

  • The outbreak of coronavirus in China and a US missile strike on Iran are two events to have hit financial market sentiment already this year
  • The gold price hit its highest price since 2013 in the wake of heightened Middle Eastern tensions, helping gold to act as a diversifier in multi-asset portfolios
  • The US presidential election looks like being the biggest geopolitical risk of 2020
  • Searching for opportunities to improve portfolio yield is important if price returns disappoint
  • Higher fiscal stimulus, not least in respect of climate change, is on the cards.

Geopolitical tensions

The year is barely a month old and financial markets have been rocked by heightened geopolitical tensions, with a US missile strike on Iran, and the climbing human and economic toll of a coronavirus outbreak.

Presidential race

With an American presidential race heating up, probably the most notable geopolitical risk this year, the US-China trade dispute and the European Union and the UK government embarking on trade negotiations, more geopolitical eruptions are likely.

Financial markets

Financial markets tend to be fragile when surprise events occur and, indeed, performances reflect an underlying feeling of nervousness, even as some equity markets hit record highs. Surprisingly, defensive companies, rather than cyclical ones, have outperformed this year.

Gold value

Unsurprisingly, gold almost reached 1,600 US dollars an ounce in January, for the first time since 2013, at the peak of the geopolitical tension in the Middle East. In doing so, the yellow metal again helped to diversify a multi-asset portfolio. In this respect, allocating to gold provides hedging and diversification opportunities at a time of heightened uncertainty.

Portfolio returns

Finding opportunities to boost portfolio returns with yield continues to have a role to play for investors. With interest rates close to record lows, yield strategies such as emerging markets sovereign debt, “alternative” strategies focusing on carry or finding companies with strong cash flow in equities to provide sources of reliable yields may be worth considering. Especially at a time when price returns from most asset classes may be more subdued.

Fiscal stimulus

Fiscal stimulus seems set, at last, to play a bigger role this year as a source of liquidity, not least with central banks almost out of monetary ammunition with rates so low. Increased government commitment to tackle climate change is one area where such, targeted, fiscal stimulus is likely to occur. The UK budget, in March, and US election race may provide some initial guidance as to the types of fiscal initiatives on the cards.

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