Fisher Investments Editorial Staff
Geopolitics, Emerging Markets, Market Risks

The Four Corners

By, 12/30/2008

Story Highlights:

  • With so much attention on the US financial landscape now, possible investing risks abroad are worth paying attention to.
  • Turmoil and negative change are a constant geopolitical risk. Recently, Guinea and Gaza (again) became the arenas for military movements.
  • Geopolitical conflicts can disrupt entire industries, sectors, and systems of supply and trade.
  • Thankfully, there's cause for optimism, too. In our view, a very important underappreciated positive is the embrace of economic partnerships between countries.


The United States' financial crisis all but captured our complete attention this year. Despite a few diversions here and there (we did elect a new president), our thoughts were riveted on unfurling financial events and the revelations of a seemingly ever-increasing universe of convoluted, "toxic" credit products. With the US government stepping in at both climaxes and lulls, we were scared to even take a bathroom break, lest we missed the next big development.

But the US doesn't exist in a vacuum. Though the inevitable landfill of US-centric analyses and commentary tempts us to stay tuned (including a self-proclaimed Russian Nostradamus hailing the disintegration of the US into six separate republics following a mass civil war next fall—the utmost ludicrous story we've read all year), other corners of the earth require vigilance too. For in these regions exist possible risks that may threaten markets going forward.

Turmoil and negative change are a constant geopolitical risk. Often, these forces can escape investors' notice. Sometimes, they're more obvious. Recently, a surprise military coup in Guinea and airstrike over Gaza stunned the international community. These two events call our attention because of their freshness, but much of today's geopolitical conflict is ongoing and no less precarious. For example, Thailand's experienced continuous political unrest following a coup in 2006, with events escalating as of late and no real, pacifying solutions in sight.

Geopolitical conflicts are a risk to markets because they can disrupt entire industries, sectors, and systems of supply and trade. Commodities industries are particularly sensitive because production is often based in emerging regions that yield new, high quality reserves and low cost production, but also where much of today's global conflict takes place. Perhaps most obvious, fighting in the Middle East typically results in pressures on the oil industry. Although the recent Israel attacks have not impacted oil prices greatly (despite a 6.1% rise in crude futures yesterday, it's trading within tighter bands than this summer), prices could become more volatile if the conflict intensifies and neighboring countries are pulled into the fray. It's worth watching.

The bloodless military coup in Guinea is largely unreported in main headlines, but could impact global commodities corporations. Guinea has the world's biggest reserves of bauxite, an ore used to make aluminum. The new ruling military junta canceled existing, "corrupt" mining agreements (some of the world's largest Materials firms have mining operations or are considering funding new mining projects in Guinea). Of course, it wouldn't surprise us if this action is retracted—after all, a military junta freshly victorious from a coup could be given to grandiose talk, and any ruling party would be remiss to handicap its nation's biggest industry. But it's too difficult to say at this point.

Conflict is a sad companion to parts of the world, but there's also optimism. In our view, a very important, underappreciated positive is the embrace of international trade partnerships. Last week, Japan and Vietnam signed a free trade agreement promising to cut tariffs on 92% of inter-traded goods and services over the next 10 years. The Association of Southeast Asian Nations (ASEAN) continues to foster investment and reduction of tariffs in the Southeast Asian region. Recently, Canada and Columbia, too, signed a free trade agreement. These new trade agreements are positive developments that will bode well for future commerce and investment. These developments may also reduce future geopolitical risks since they bolster economic integration and co-dependence, and ultimately (hopefully) create better lives for these nations' citizens. In many cases, these recent economic pacts were responses to the global financial crisis—a welcomed reaction compared to the protectionist policies during the Great Depression.

Geopolitical happenings are something investors should always keep in mind. Portfolio diversification can help mitigate the risk, but vigilance across all four corners of the earth is also critical. Often, it's the kettle not being watched that boils first.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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