Ahead of her address to the Room151 LGPS Investment Forum, risk adviser Elizabeth Stephens talks to Mike Thatcher about semiconductors, supply chains and ‘safe’ countries in which to invest.
In times of heightened geopolitical risk, investors tend to move away from assets such as equities and towards perceived “safe” vehicles such as government bonds, while also shifting money from emerging markets and into developed countries.
With Russia invading Ukraine, China threatening to annex Taiwan, and North Korea firing missiles over Japan, we are living in the most unstable time since the end of the Cold War. So will this trigger a move to ultra-safe investments for institutional investors such as the Local Government Pension Scheme (LGPS).
“Not necessarily,” suggests Elizabeth Stephens, who will be speaking on the “geopolitics of investing in the 2020s” at Room151’s LGPS Investment Forum on 2 November.
“What investments would you consider ultra-safe now? I have clients asking me if there is going to be a civil war in the US and we’ve seen what happened to sterling recently. There are no areas of the world now that are ultra-safe” says Stephens, who is founder of Geopolitical Risk Advisory.
“It might be that there is no such thing as a good or a bad country – there is just good or bad trade and investment.”
What investments would you consider ultra-safe? I have clients asking me if there is going to be a civil war in the US and we’ve seen what happened to sterling recently. There are no areas of the world now that are ultra-safe.
Spheres of influence
Investors should take note of developing “spheres of influence”, she suggests. China has built up influence in Africa and South America since the start of the 21st century, while Russia initially benefited from India’s neutral stance on the war in Ukraine (though, more latterly, India has questioned the wisdom of the war).
“I think the South will come on board with the West over Ukraine because of the financial costs. We could see a shift there, though we have to bear in mind that China is more influential than it was.”
Within Europe there is also a “fracturing” taking place, with Britain exiting the EU, a right-wing prime minister elected in Italy, and Germany announcing a €200bn “economic shield” to protect its industry and households from soaring energy prices.
Stephens says the world maybe more unstable, but the number and variety of tools available to investors to understand geopolitical risk have never been greater either.
Scenario planning
“The most successful global companies will be those that consider geopolitical risk, discuss it at board level and use scenario planning to help determine their strategies.”
Scenario planning is particularly useful for maintaining supply chains. Stephens highlights the manufacture of semiconductors where the market is dominated by Taiwan, and developed countries such as the US (through the CHIPS Act) are desperately trying to develop a domestic source of supply.
She suggests that a retreat from globalisation is unlikely to stop at semiconductors. “If the West is doing this for semiconductors, will they start to do it for crucial medicines? And what about food supply?”
However, there is still potential for manufacturing hubs to develop in areas where labour costs are low such as Africa. “Wages in China are very expensive, so African countries would be an obvious alternative,” she says.
Room151’s LGPS Investment Forum takes place on 2 November at the London Stock Exchange.
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