Geopolitics is often cited as a key driver of market volatility, but history shows that for investors with diversified portfolios in global equities, it does not necessarily dictate long-term performance.
While geopolitical events and wars can certainly create short-term disruptions, their lasting impact on equity returns has been relatively minor over the long haul. Examining the 20th century and its myriad of geopolitical events, wars, disasters, etc., provides insight into this phenomenon, showing how the global stock market has withstood various shocks, only to rebound and continue its upward trajectory.
Take World War I, for example. It had a significant impact on the world, reshaping borders and political landscapes. Yet, despite the dramatic shifts in global power structures and economies, the US stock market, which represents a large share of global equities, experienced only temporary setbacks. Following the end of the war, the market rebounded and entered the ‘Roaring Twenties’, a period of economic prosperity and stock market growth. This historical context demonstrates that while geopolitical turmoil can create uncertainty, it often doesn’t leave a lasting mark on well-diversified portfolios.
Similarly, the Great Depression and World War II marked a period of significant upheaval. The global stock markets experienced substantial volatility during these times, but the longer-term trends showed resilience. From 1941 to 1942, the US stock market saw a significant downturn, driven by the entry of the United States into World War II. Yet, this period also marked an excellent buying opportunity for long-term investors. As the war progressed and post-war reconstruction began, the market rallied, leading to decades of prosperity. This pattern suggests that even major geopolitical events with worldwide consequences might not derail long-term market growth and can create opportunities for astute investors.
The Cold War era too, marked by a tense geopolitical standoff between the United States and the Soviet Union, further underscores this point. Although the threat of nuclear war loomed over much of the second half of the 20th century, global equity markets continued to rise. Investors who stayed the course and maintained diversified portfolios benefited from the overall resilience of the market despite ongoing geopolitical tensions.
In more recent history, events like the September 11th terrorist attacks in 2001 and the 2003 Iraq War had immediate effects on market sentiment, causing short-term declines. However, these shocks were followed by recoveries and subsequent growth in global equities. The S&P 500, for instance, demonstrated a strong rebound following the initial shock of the 9/11 attacks, eventually reaching new highs.
This brings us to the present, with ongoing tensions in the Middle East and the war in Ukraine. These events have caused humanitarian crises and significant political disruptions, yet their sustained impact on global equity markets has been limited. Markets remain inherently adaptable, with investors showing resilience in the face of uncertainty. Despite increased volatility and brief market downturns following such events, the overall trajectory tends to recover.
Investors should, however, be aware of the potential for escalation in geopolitical conflicts. The risk of broader wars or extended disruptions could influence market sentiment and performance. While these risks are real, it’s crucial not to make rash decisions based solely on geopolitical headlines. Diversified portfolios act as a buffer against localized risks, allowing investors to weather the storm and emerge stronger when markets recover.
Moreover, when geopolitical events do lead to significant market downturns, they can present unique buying opportunities. The 1941-1942 period during World War II serves as a compelling example, where the market decline created favourable entry points for long-term investors. This pattern repeats throughout history, suggesting that while geopolitics can influence markets in the short term, it often creates openings for value-based investing.
In summary, geopolitics has a limited effect on long-term returns for investors with diversified portfolios in global equities. While conflicts and wars may cause temporary market disruptions, history shows that markets tend to recover and resume their upward trajectory.
Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.
