Introducing The Milwaukee Company’s Global Risk Assessment

  • International investments can create important diversification benefits that enhance returns and lower volatility over the long term.
  • Investing overseas introduces political, fiscal, and market risks not associated with domestic investments. These risks should be identified and managed – but not eschewed.
  • The Milwaukee Company’s Global Risk Assessment is a monthly post that provides readers with our current assessment of these risks.

     “I love my country far too much to be a nationalist.” – Unknown


I have previously written about the inherent value of global diversification and how exposure to international stocks can improve portfolio performance over the long term.  As my prior post explains, portfolios that are concentrated in one country or region are more vulnerable to political, monetary, fiscal, and market risks unique to that country or region.

At the same time, investing outside the U.S. introduces unique risks that are not present when investing domestically.  Smart investors do not avoid these risks; rather, they identify and manage them, and take steps to mitigate those risks when they are elevated.

Measuring global risk is a tricky business.  It requires evaluation of economic developments using data that is not always reliable.  In addition, political developments can change on a moment’s notice with no apparent rhyme or reason.  Fortunately, this challenge has attracted many talented economists, researchers and other thinkers who, in turn, have developed indexes that can help inform efforts to evaluate the degree of risk unique to foreign investments.  Three of my favorites are the Geopolitical Risk Index, the Trade Policy Uncertainty Index, and BlackRock’s Geopolitical Risk Indicator (BGRI).

The Geopolitical Risk Index was originally developed by economists at the Federal Reserve and is currently maintained by an independent group of academics.  It uses the number of “words related to geopolitical tensions in 11 leading international newspapers” to evaluate geopolitical risks.

The U.S. Monthly Trade Policy Uncertainty Index “reflects the frequency of articles in American newspapers that discuss policy-related economic uncertainty and also contain one or more references to trade policy”.

The BlackRock Geopolitical Risk Index “tracks the relative frequency of analyst reports, financial news stories and tweets associated with geopolitical risks.”  Its weekly publication schedule gives it the advantage of being more responsive to international developments.

Consistently tracking multiple indexes over extended periods of time can be a useful step to assessing the current international investment climate.  In addition, judgement based on careful analysis of political, economic and societal factors also has an important role to play.  To that end, I am pleased to announce “The Milwaukee Company’s International Riskdometer™”, which provides our assessment of the degree of risk associated with investing internationally.

Commentary – Rising Tensions with Iran

The two most significant events impacting international markets during the last several weeks were the U.S. drone strike that killed Iranian General Qassem Soleimani on January 3rd and signing of “Phase One” of the U.S.-China Trade Agreement on January 15th.  (The ongoing coronavirus scare will be the subject of an upcoming post.)

The initial impact of America’s unexpected show of force against Iran was predictable: the price of Brent crude, a global benchmark for oil prices, rose by about 3%, and rallies in international stock markets were brought to an abrupt halt as investors moved money into traditional safe havens such as gold and government bonds.

Since then, both Iran and the U.S. have taken a step back from the brink of a shooting war, and international markets have calmed.  Moreover, long-standing sanctions on Iran have resulted in very few American, Japanese or European businesses having financial interests in Iran.  Indeed, the share of revenues coming from all of the Middle East and Africa for European firms was just 4.9%, and for Japanese firms it was a paltry 1.8%.  This implies that long-term share prices of companies in the world’s major developed markets would be largely unaffected by conflict between the U.S. and Iran.

Meanwhile, the U.S. and China trade deal obligates China to take measures to halt the theft of American technology, to purchase $200 billion worth of U.S. goods, and to stop manipulating its currency in an effort to gain unfair trade advantages.  The deal also includes an enforcement system that is intended to ensure China upholds its end of the bargain.

In sum, key global market indexes suggest that international risks rose in January, as the U.S. killing of a top Iranian general has significantly elevated tensions between the U.S. and Iran, and brought more uncertainty to an already volatile region. In the midst of this uncertainty, prospects for trade tensions have eased and the outlook for global growth appear to be improving, as evidenced by the International Monetary Fund’s recent forecast that calls for global GDP of 3.3% in 2020. Consideration of all these factors cause us to rate the current outlook for international securities as “choppy”

I hope you enjoyed the first installment of The Milwaukee Company’s Global Risk Assessment.  Please reach out with any questions, comments, or feedback that you care to share.  I would enjoy hearing from you.

Thank you for reading,

Mr. Market Commentator

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Important Disclosures:  Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly from The Market Commentator℠, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in The Market Commentator℠ serves as the receipt of, or as a substitute for, personalized investment advice from The Milwaukee Company™.

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