international investors are again concerned about increased geopolitical risks and their impact on the global economy

International investment fund managers are again concerned about increased geopolitical risks and their impact on the global economy. But unlike the situation a year and a half ago, these risks did not become dominant. Investors have partially adapted to armed conflicts. They are largely forced to increase the share of cash in their portfolios by fears of tightening policies of the world’s leading central banks.

October brought a sharp rise in tensions in the Middle East, and with it increased anxiety among international portfolio managers. This is evidenced by an October survey conducted by Bank of America (BofA). Representatives of 295 funds with total assets of $736 billion took part in the survey. According to the survey, 24% of respondents said that geopolitics is a key risk with unpredictable consequences for the global economy. In September, only 14% of respondents held this opinion. At the same time, the number of managers fearing a tightening of central bank policies fell from 40% to 31%.

Managers expressed more significant concerns about the geopolitical situation in the world in March 2022. Against the backdrop of the start of the SVO, the share of respondents who named such risks as key for the global economy soared from 6% (in February) to 44%, displacing the risks of a global economic recession into second place (see Kommersant, March 16, 2022). In subsequent months, the severity of this risk decreased, although BofA analysts noted, in addition to the confrontation between Russia and Ukraine, the escalation of relations between China and Taiwan. At the same time, since the summer of this year, analysts of the American bank have stopped noting what geopolitical risks are associated with, and they did not do so in the latest report.

After the events of February 2022, geopolitical shocks in different parts of the world no longer cause the former reaction of managers, who, in fact, have adapted to the increased level of uncertainty, says Konstantin Asaturov, managing director of the equity department at Sistema Capital Management Company. “Under current conditions, the Palestinian-Israeli conflict is still viewed as a local event in the region that does not have a strong impact on the growth rate of the global economy,” he notes. However, according to a BofA survey, the share of managers who fear a recession will occur in the near future increased from 13% to 21%.

Even with the current risk assessment, investors have begun to increase the share of cash in their portfolios. According to BofA estimates, it increased by 0.4 percentage points (pp) over the month, to 5.3%. At the same time, portfolio managers were actively reducing investments in the European market. In October, the number of portfolios in which their share was below the indicative level was 19% higher than the number of those in which it was higher. Over the month, the number of pessimists increased by 9 percentage points. Optimism remained regarding American stocks. The number of managers whose weight exceeded the indicative level was 6% higher than the number of those whose weight was lower. Over the month, the indicator increased by 1 p.p.

As Dimitry Rezepov, Deputy Director for Investments at General Invest, notes, data on the US economy show better dynamics than market participants expected. At the same time, the eurozone economy is teetering on the brink of recession, especially given the weak data from Germany. “Investors remember the energy crisis of last year. And although European countries had enough time to prepare for the winter season and fill gas storage facilities, unrest in the Middle East increases the likelihood of new energy collapses,” says Mr. Rezepov.

The Russian market may be among the beneficiaries of a possible energy crisis and rising energy prices. However, Igor Kozak, managing director for investments at TKB Investment Partners, points out that in the event of a global recession, the cost of traded goods may show negative dynamics. This will lead to an increase in the budget deficit and a further weakening of the Russian currency. “A weak ruble will have a negative impact on inflation and will lead to a tightening of the Central Bank’s monetary policy, which will have an extremely painful impact on the Russian debt market,” he notes.

Vitaly Gaidaev