On the plus side the United States economy is picking up nicely with growth of 2.5% expected this year, and consumer confidence in the world’s key market was yesterday reported to be at its highest since 2007.
In the UK, developed world leading growth of 3.2% is forecast for this year and unemployment continues to plummet. Meanwhile over in Asia Japan is finally on the mend as Abe’s bold policies yield fruit and China is still growing robustly at over 7%, if not quite hitting the 9% area once seen.
Markets have so far been very resilient to the various geopolitical crises around the world however it could be argued that the two main flashpoints are only in their infancy and will truly play out over a much bigger scale and longer timeframe.
The performance of major stock indices has been solid over the past 12 months, and in the US new highs are being reached. New highs of course, can in some cases be perceived as the starting gun for a sell-off.
There are a couple of fundamental underlying issues however which are at too early a stage to have any major impact right now but potentially could grow into something that derails global economic growth if the wrong things happen from here on.
The introduction of trade sanctions between Russia and the West has largely been shrugged off but if it is the forerunner of a much wider-ranging and deeper move away from free trade then the apparent indifference of markets will inevitably give way at some point.
Ukraine and Russia continue to tread a tightrope and the outbreak of a full scale war could see a complete end to trade between Russia and the West, and possibly pull China and other nations into policies of economic nationalism and protectionism.
There is also the possibility of what at one stage looked to be no more than a minor engagement of Western air power in Iraq to pacify the Islamic State escalating into a large regional conflict which hits energy markets hard and further destabilises the world economy.
Given all this, the argument that a prudent step for investors would be to add some level of additional defensive tilt to portfolios does have weight, even if your view is that the worst case scenarios are unlikely to materialise.
Threadneedle Investments' head of global equities William Davies appears to be in in this camp. “Globalisation reversal calls for rising risk-premium and more defensive investment stance,” he said.
“Following recent news, investors would be forgiven to think that the Ukraine crisis is de-escalating, however they can’t afford to take their eye off the ball,” he added. Davies said investord should now 'sharpen their focus’ on geopolitical tensions and face the reality of rising risk premia.
Davies explained that what he calls the ‘reversal of globalisation’ seen recently could take us towards ‘a low-growth world.’ This would pressurise European stocks in particular as well as many other global companies.
“With the potential for escalation of sanctions remaining a live issue, equities should command a higher risk premium,” Davies said. “We believe it is time for a more defensive position,” he added.
