Whether it’s nuclear tensions on the Korean peninsula, revolution in the Ukraine, the Brexit vote in the U.K. or an unpredictable legislative agenda from the Trump administration, there is no shortage of geopolitical issues for investors to consider. However, for us as long-term investors, the question is: When do these stresses create buying opportunities?
Managing risk amid geopolitical tensions
I’ve written in the past about how we manage risk in emerging markets. The same strategies and discipline apply when mitigating risk related to geopolitical issues. In fact, it’s the very structure and discipline of our investment approach that is the basis of our risk mitigation overall.
At its core, our discipline involves finding high-quality companies, buying them at attractive valuations and holding them for long periods of time. Sounds easy, right? Rarely. Simple, yes, but definitely not easy. It requires an enormous amount of time, research and on-the-ground knowledge to discover, understand and build conviction in a specific business. This is particularly true in the emerging markets space because it is so vast – spread around the world and in many cases uncovered by investment analysts.
This level of research allows us to understand a company to such an intensive degree that we’re able to place the business in context when geopolitical issues arise. Conviction means we’re willing to tolerate short-term weakness based on confidence in upside opportunity for a particular company, in virtually any market environment.
Geopolitical risk in emerging markets
In many ways, emerging markets face more of these geopolitical issues than other regions, simply due to the nature of governments in some countries.
But emerging markets are not homogeneous – the asset class is made up of a wide array of countries, sectors, governments and, of course, businesses. In my opinion, it does investors a real disservice to paint “emerging markets” all with the same brush. For example, India and Egypt, or China and Chile together doesn’t make a lot of sense from a research perspective. The differences are vast, from culture, language and government to economy, demographics and growth.
Many countries are not what they used to be, and, importantly for us as stock pickers, many companies aren’t either. Traditionally perceived as an intimidating place to invest, the reality of many emerging-market countries today is very different than it was a mere 20, or even 10, years ago.
I think it is important to note that geopolitical risk is not new. When investing in global markets, geopolitical risk is, and always has been, present. I have been investing in global markets for decades, and my view has always been that I won’t let these issues alone deter me from investing in attractive businesses. To be clear, that doesn’t mean we don’t take the current environment seriously, or that we turn a blind eye. We are always mindful of the geopolitical situation, but we also keep an open mind about every company, no matter where it is headquartered.
Active managers, at the ready
While often unpleasant for a country’s citizens, or the global community as a whole, when issues arise that cause volatility in stock markets, active managers like us tend to go into overdrive. We spend time on our watchlists, observing favourable companies – preparing to buy when valuations reach the level that we believe is attractive and provides the margin of safety we’re seeking.
In my view, active management – true active management – becomes especially valuable during times of geopolitical uncertainty.
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