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Perpetual knowledge bank series: geopolitical risk

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Increasingly interconnected national economies have underpinned the global economy in recent decades, but free trade and financial order cannot be taken for granted. And while it can be debated whether the world is a less stable and more dangerous place than a generation ago, it is clear that the global economy is still very much downstream from global politics. For example, Europe’s reliance on Russia for 40 per cent of its energy is forcing a whole continent to confront big questions about its future energy supply after the invasion of Ukraine. 

For investors, it is essential to understand the potential impact that geopolitical events can have on the business activities of companies they are invested in. Examples of geopolitical events that put companies at risk include governments that expropriate assets, nationalise property, impose stringent regulatory requirements or limit foreign direct investment. Unstable regimes or upcoming elections may also pose a risk as potential new governments may have unfavourable views towards certain foreign firms. In even more extreme cases, organised crime syndicates, terrorist organisations or rebel groups may threaten the supply chains, assets and personnel of foreign firms. 

While geopolitical risk typically refers to issues that come with investing in foreign markets, these can influence market conditions in both industrialised and developing countries. Therefore, the ability to both understand and assess potential macroeconomic challenges before they become problems is an important part of any effective geopolitical risk assessment. And even if they still believe the opportunity is worth pursuing, investors need to ask themselves how much financial uncertainty and volatility – and over what duration – they are prepared to tolerate.

This analysis has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.

The information is believed to be accurate at the time of compilation and is provided in good faith. This document may contain information contributed by third parties. PIML and PSL do not warrant the accuracy or completeness of any information contributed by a third party. Any views expressed in this document are opinions of the author at the time of writing and do not constitute a recommendation to act. 

The product disclosure statement(PDS) for the Perpetual Diversified Income Fund issued by PIML, should be considered before deciding whether to acquire or hold units in the fund. The PDS and Target Market Determination can be obtained by calling 1800 022 033 or visiting our website http://www.perpetual.com.au

No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.