Geopolitics number one risk factor for investors

Originally published on 07 September 2017

Geopolitics has now become the number one concern of global institutional investors, eclipsing their fear of rising interest rates or economic slowdown, according to a recent study conducted by Allianz Global Investors (AllianzGI).
For the first time since the AllianzGI RiskMonitor study was launched globally in 2013, geopolitical concerns top the list of risk factors for the 755 institutional investors surveyed, who represent $34.2 trillion in AUM across North America, Europe and Asia-Pacific.
Of the global investors surveyed, 44% say that geopolitics represent a major risk to investment performance – ahead of a global economic slowdown (41%) and rising interest rates (32%).
Neil Dwane, Global Strategist at AllianzGI, said: “This study highlights the extent to which geopolitical uncertainty, including the ongoing tension in North Korea, which has only increased since we conducted our survey, is weighing on investment decisions. Financial markets have never operated in a vacuum, but geopolitics now appears to be having a greater impact than at any point in recent memory on how global investors are behaving.
“Add into the mix that 31% of investors also told us that US politics is an investment concern, and it becomes clear that politics is really piling pressure on markets. As a result, investors are increasing their focus on risk management and downgrading their return expectations as they struggle with a risk-return conundrum, despite the recent strong run in equity markets. The question on investors’ minds is whether markets have priced in all of the risks.
“With yields globally still repressed, it is only by taking risk that investors can earn some return. But they want to be confident that they can react quickly to any recalibration of assets, and capture any opportunities while optimizing their downside protection.”
Event risk and equity market risk have also risen sharply up institutional investors’ agenda over the last 12 months:

  • More than 9 in 10 investors (91%) see event risk as a threat, compared with only three-quarters in 2016
  • Equity market risk has taken a similar prominence, weighing on the minds of 90% of investors (2016: 77%)
  • Reflecting this focus, nearly 3 out of 5 investors (59%) claim that recent political events have led to an increased emphasis on risk management in their institution.

In their quest to balance risk and return, active management comes to the fore as two-thirds (65%) of investors say that actively managed investments play an important role in portfolios in the current market environment.

The RiskMonitor findings show that investors face a risk-return “conundrum”, as they seek to optimize the risk-return trade-off in uncertain markets. This caution is reflected in return expectations for the coming year, with more than half (51%) lowering their targets despite a strong recent performance by equity markets.
Revealingly, 53% are willing to sacrifice upside potential in order to have tail-risk protection.
As they struggle to reconcile the risk-return conundrum, investors see shortcomings in existing risk management approaches. Nearly 3 out of 5 (58%) are looking for new portfolio strategies that balance the risk-return trade-off. But they acknowledge the value of alternative assets for diversification, with 31% citing this as the single most important reason for investing in alternatives – ahead of any other factor.
Encouragingly, the study reveals a select group of investors that are getting ahead of the risk-return challenge. These “Risk Leaders”, comprising around one-fifth of respondents, make risk management an integral part of the investment process. They are also characterized by a strong risk culture, led by senior management.