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 If NAFTA were repealed, each NAFTA country would revert back to WTO tariff levels.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.
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.
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”.
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.
This document has been prepared by ATB Investor Services. ATB Investment Management Inc., ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund) and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Investor Services. ATB Financial is a registered trade name/trademark of Alberta Treasury Branches. The information contained herein has been compiled or arrived at from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness and ATB Investor Services (nor its component legal entities) does not undertake to provide updated information should a change occur. This document is being provided for information purposes only and is not intended to replace or serve as a substitute for professional advice, nor as an offer to sell or a solicitation of an offer to buy any investment. ATB Investor Services, ATB Investment Management Inc., ATB Securities Inc. and ATB Insurance Advisors Inc. do not accept any liability or responsibility whatsoever for any loss arising from any use of this document or its contents. Always consult with your investment advisor before buying or selling securities. This document may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions and conclusions contained in it be referred to without the prior consent of ATB Investor Services.
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