Investing through geopolitical uncertainty

By ATB Investment Management Inc. 8 March 2019 3 min read

NAFTA - Yes/No?

Recent headlines have put the North American Free Trade Agreement (NAFTA) in the spotlight, as Canada, the United States, and Mexico return for the sixth of seven planned rounds of negotiations. All sides are attempting to reach consensus on the future of the trilateral free trade agreement. NAFTA is considered the pioneer of global free trade agreements, and it preceded the founding agreements of the World Trade Organization (WTO). If NAFTA were repealed, each NAFTA country would revert back to WTO tariff levels. New agreements, trilateral or bilateral, would eventually be made but not without media hype contributing to investor uncertainty. While trade disruptions may not be good for the Canadian economy, economies and markets have a tendency to adapt. Speculation about the potential impacts of a NAFTA repeal are rampant, but it is a important to separate political drama from investment reality. For example, as shown from Britain’s exit from the European Union (Brexit), investors quickly adjust to “new normals”, financial market volatility dissipates and returns smooth out over time.


Media buzz

What do North Korea, Brexit and NAFTA have in common? All are geopolitical headlines that create great buzz for the media. After all, in a world where 24 hour news is continuously recycled, they need something to talk about. The unfortunate side effect for investors is that constant media coverage can intensify towards either euphoria or panic. For example, news that North Korea fired test missiles over Japan can be concerning, but hearing it over and over again can amplify concern into needless panic.


I Predict...

Economists, analysts and other market experts have incentives to capitalize on the see-sawing effects of media hype. The 24-hour news cycles provides such experts with a platform to sell their market predictions, while in reality very few economic or market predictions are accurate (and the people making them often don’t even put their money where their mouths are).

Investors can easily get caught in the hype of the newsreel and end up worse for it. The skillful investor, however, tends to move in the opposite direction of the emotions conjured or amplified by the media, and takes advantage of situations exemplified by either fearful or exuberant investors. As Warren Buffett once said “Be fearful when others are greedy, and be greedy when others are fearful”.


Remaining calm

The news sometimes reads like a highly dramatic fiction novel, and the narrative supported by expert predictions can further drive the swings experienced by investors. However, investors should remain calm, disciplined and continue to follow their investment process. For example, at the beginning of 2016 amid Brexit talks and the US presidential race, stock markets were down 10%1 in the first 28 trading days. This marked the worst start in 120 years and many reputable analysts were urging investors to sell. However, markets rallied from that point forth and through 2017. Selling in January and buying back after markets swung upwards would have meant selling low and buying high, which is counterproductive to achieving long-term investment goals. For most investors, remaining invested through market gyrations and uncertainty yields the best results.


The Time to Invest Rarely Feels Perfect

If you take a look back in time you will see that clearly history is not without dramatic events. Despite intra-year market fluctuations and even recessions, there is a clear benefit to staying invested despite headline news. Divesting during times of uncertainty ultimately erodes investors’ capital, and means they miss the upswing when markets eventually recover. The future never exactly resembles the past, but what remains constant is that media buzz should not trigger action within a portfolio. In times of political uncertainty - which is almost always - a well-constructed and properly diversified portfolio allows an investor to tune out the media noise and remain focused on their long-term goals.


Source: Bloomberg​​​

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