How Do You Build in Geopolitical Risks to Your Portfolio?

The Iranian backed attack by the Houthi Rebels against critical Saudi crude infrastructure is clearly an escalation of negotiating tactics. The US led sanctions since breaking the Iran nuclear deal is economically painful for Iran. We also saw Iran flex their muscle in the Strait of Hormuz by detaining a British tanker last month and again just hours ago. When you’re fighting from a position of weakness, you tend to have backdoor strategies meant to undermine your opponents’ options.

Events like this, as tragic as they are, are a part of the world we live in. I do not expect there will ever be peace in the Middle East and spikes in oil prices are always a risk. Because of that, the market tends to bias prices upwards in times when these risks are higher. In the grand scheme of things from an investing standpoint, they are noise events and should largely be ignored. From a strategic standpoint, they create short-term imbalances that can be profitable. I don’t recommend the average DIY armchair quarterback try to play them, but they are typically driven by panic and thus create opportunity.

For a fiduciary manager like myself where it’s not about speculating and more about prudence, I have been positioned extremely defensively already for economic risks. Today I will benefit from long positions in the energy sector, duration (long US treasuries) and gold (equities). The positions I have in US and international equities will likely get hit a bit and maybe a lot of there is a US military supported response in the coming days\weeks. So far, the Canadian dollar has strengthened because of the higher crude price, where typically in a escalation of war risk, the US dollar strengthens.

Obviously, the energy sector is a focus today. I still think the bigger economic trends are pointing to a recession, and it’s a major reason why the sector has underperformed consumer and cyclicals and technology that have been big winners this cycle. But once the dust settles on this issue, and that is the toughest part to analyze, then price gains in the sector will revert back to previous trends. In a recession, world oil prices are closer to $30 than $70. At this point, we should expect a military response. This is what most of the geopolitical thinkers I’ve read over the weekend suggest. Seems logical to me. So energy stocks and futures likely stay better bid for a while. But they will most likely drop back significantly once the temperature drops. Again, impossible to time with any accuracy.

For me, I’ll look to reduce some of my energy exposure and if oil prices get high enough, I would look to short oil in the mandates where I can do that. Some price north of $65 to $70 looks like the technical chart range to do that.

After last weeks sheer drubbing in the bond world, the flight-to-safety quality of US treasuries is shinning today. This speaks to the need and understanding of how to use fixed-income in your portfolios going forward and understanding how to factor geopolitical risks into your portfolios. This is the subject of my upcoming Fall 2019 BNN Roadshow called Fixing Fixed Income – The elusive quest for A Real Return.

If you’re NOT a millennial, you might remember the good old days where you could earn 6-8% with very little risk, simply buying bonds. If you have greyer than Larry does, you’ll remember the bad old days of double-digit inflation and 15% bond yields in the 1970s. The great financial crisis ushered in a new era of massive debt and ultra-low rates. Now as far as the eye can see, fixed income is “broken” because, in real terms, rates are somewhere between zero and negative. Should you just forget about this asset class entirely? Is higher risk investing the new normal? Will inflation come back? Will Modern Monetary Theory and popularist politics turn the financial world on its head? Will we all be forced to pay banks to keep our cash safe in the near future? Join Larry for an overview of how to understand fixed income, how it has historically played a role in portfolios, and how/why we’ve arrived at the current paradigm.

It’s not all bears and bond bubbles however. As usual, we’ll be showcasing portfolio techniques for thriving in the times we’re in, and what may be around the next corner. We’ll look at liquid alternatives, convertible bonds, options strategies and currency strategies as a source of yield, high yield without the high risk, and long/short tactics for navigating the forgotten world of fixed income. Larry will bring it all together for you in a portfolio context with ideas on how to use ETFs along with less correlated investment instruments (like gold) to put these ideas into action.

Click here to register for free and as always we ask for volunteer donations to one of our two favourite charities. Children’s cancer research at the Sick Kids Hospital and Alzheimer’s and dementia research at the Baycrest Hospital.


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