Geopolitical tensions have come to define 2014, dominating headlines throughout the traditionally quiet summer months.
With few signs of trouble abating, investors may feel wary as they go into the last quarter of the year.
Russian president Vladimir Putin has flexed his political muscles as the crisis in Russia/Ukraine rumbles on, in spite of the sanctions against his country imposed by the US and the EU over its annexation of Crimea.
Elsewhere, tensions have been rising in the Middle East, conflicts in Syria, Iraq and Israel/Gaza creating some uncertainty for markets.
The rise of the so-called Islamic State prompted UK prime minister David Cameron to return from his holiday briefly in response to the murder of an American journalist by a British jihadi.
As Kully Samra, managing director of Charles Schwab UK, points out: “Certainly there are risks in the market and, as always, the possibility of more severe selling exists.
“Escalating tensions on the Ukraine border, the Israel/Gaza conflict, violence and military action in Iraq, economic concerns rising in Europe, and the possibility the Fed may move sooner than expected are all ingredients in the cocktail of risk.”
He adds: “The Russian situation seems to be the most concerning at this point, with sanctions hurting a Russian economy that was already struggling, but also potentially impacting some European companies in the near term.”
Bjorn Lindstrom, portfolio manager at Alpcot Capital Management, suggests the outlook for the Russian equity market remains clouded by the situation in Ukraine.
“While the Russian market trades at historically low valuations, heightened political tensions cap the upside as the US/EU and Russia have engaged in a series of tit-for-tat economic and political sanctions,” he notes.
“Recent events have tarnished Russia’s reputation, which will not easily and quickly be restored, but the potential of a peaceful resolution of the situation in eastern Ukraine could pave the way for a small relief rally and a gradual normalisation of relations with the US/EU.”
Mouhammed Choukeir, chief investment officer at Kleinwort Benson, says: “Geopolitical tensions will undoubtedly create jitters in markets in the short run, but their impact on medium and longer term performance is likely to be minimal, unless conflicts significantly change the course of market fundamentals.
“The data just does not support the ‘geopolitical tensions are bad for markets’ hypothesis.”
He cites the Cuban missile crisis in October 1962 when an investor in the S&P 500 index would have been up 7 per cent in the following month, up 16 per cent over the next quarter and up 34 per cent a year later.
While political leaders are responding to these regional conflicts, investors’ attention is being diverted away from the real issue, which is when will central banks raise rates?
Ellie Duncan is deputy features editor at Investment Adviser
