Investors are often advised to drown out the noise and avoid making rash decisions based on macro movements, but their impacts on portfolios are becoming increasingly difficult to ignore. The soaring inflation and interest rates triggered by Russia’s invasion of Ukraine in 2022 have had a profound effect on markets, and geopolitical tensions have only become more heightened and widespread in the ensuing years.
Even bottom-up stockpickers such as Nedgroup’s Mark Landecker have to take macro factors into account when making investment decisions to ensure they are not walking into any traps unwittingly. “We think of ourselves as macro aware,” he said. “It’s not so much that we specifically are making macro forecasts, but we don’t want to step on mine fields that we should have known existed.”
Despite still being focused on the fundamentals of companies, Landecker said ignoring macro can be a dangerous game. Many bottom-up fund managers will claim that watching such data points will distract investors from their long-term goals, but being aware of the macro world has steered his Nedgroup Contrarian Value Equity fund clear of hazards that crippled other asset managers.
“Many value investors were in housing stocks around 2007 and 2008,” Landecker said. “They looked really cheap and had mid-single digit earnings multiples, so what could go wrong? The manager at the time Steven Romek was aware that it seemed a little hot and frothy at the time so decided not to play there
“I’d say be aware of where the potential pockets of weakness in an economy are and steer clear of those. If we feel like there’s an industry that’s overheating – or that it’s running above trend and above average – we want to be mindful of that and incorporate those thoughts into our models.”
Yet global markets have become even more volatile and difficult to predict since the global financial crisis. Sensing the growing influence of geopolitics on markets after conflict began in Ukraine, Amundi, one of Europe’s largest asset managers, created a dedicated role to analyse it.
Anna Rosenberg was appointed head of geopolitics in 2022 to advise its fund managers – who run €2.1trn in assets – on how it could impact their portfolios. And given how tensions across the globe are only growing, Rosenberg expects geopolitics to play an increasingly important role in investment decision making over the next decade.
But some fund managers might be slow to pick up on this. Many have been taught over their whole career to analyse individual companies without being influenced by the sectors or regions they sit in – an approach that is slightly hypocritical when they use some forms of risk mitigation and ignore others, according to Rosenberg.
“You care about a company’s ESG ranking but you don’t care about a company’s geopolitical exposure? That’s madness,” she said. “You need to understand if a company is at risk because of geopolitics, so it’s as much bottom up as it is top down.
“I think we are seeing that everyone – economists, forecasters, portfolio managers – all have to better learn how to deal with geopolitics and understand what it means and how it affects them.”
Nevertheless, most fund managers now understand the growing importance of geopolitics in investing, following several years in which macro factors have dictated markets. Rosenberg even said the monotonous use of it in reports and earnings calls has turned geopolitics into “a buzzword” in the industry. “Sometimes for fun during calls I write down how often my colleagues say it,” she joked, “but it shows you how it is informing the backdrop against which decision makers are making decisions.”
Yet while many asset managers are factoring in geopolitics, most lack the knowledge to do so in a sophisticated way. “Geopolitics is so central these days to every portfolio manager, but you don’t have anyone who actually has the qualifications,” Rosenberg explained. “There’s a lot of opinion sharing, but not necessarily analysis, and I think there is a need to have a common level of understanding so that you have a discussion based on a factual basis.
“People have realised this is here to stay, but they don’t know how to deal with it. Some of them are trying to figure it out and create trading models and tools, but we’re talking about economists and people who have studied economics here – they think they will find the answers in the data, but the reality is that the data is very often not predictive, it’s usually retrospective. So the data can be supportive, but it doesn’t tell you what’s going to happen. That’s why you really need political analysis.”
But how are portfolio managers themselves implementing this? Francesco Sandrini, who manages Amundi’s multi-asset strategies and is advised by Rosenberg on macro matters, said he has made investment decisions that were influenced by geopolitics. He noted that it is often mentioned in the context of avoiding risk – just as it stops Landecker “stepping on mine fields” – but it is equally about finding new opportunities.
Like with any change, it brings opportunities. Nearshoring, for example, is a theme that has come about due to the shifting geopolitical landscape. Sandrini has upped exposure to places such as Mexico and Indonesia in order to “play the new political equilibrium”. So while factoring in macro movements and geopolitics into investment decision making can help avoid risks, it shouldn’t be framed purely as that.
“The universe of opportunities is much more scattered than it was a few years ago, but geopolitics is not just a risk,” Sandrini said. “Because we’re in this change of equilibrium where we are moving away from a purely US-centric multilateralism to a more multipolar world, geopolitics is creating interesting investing opportunities. You have to see it with this double metric in order to take advantage.”
