1 00:00:05,880 --> 00:00:08,560 Speaker 1: Welcome to the Fear and Greed business Interview. I'm Sean Almer. 2 00:00:08,720 --> 00:00:11,360 Speaker 1: We all know that geopolitical events have an impact on 3 00:00:11,440 --> 00:00:15,360 Speaker 1: financial markets, but predicting when these geopolitical events will flare 4 00:00:15,480 --> 00:00:18,360 Speaker 1: up by the conflict between Israel and Iran isn't easy, 5 00:00:18,840 --> 00:00:22,040 Speaker 1: nor is what it actually means for the market. That's 6 00:00:22,079 --> 00:00:25,479 Speaker 1: what makes the Geopolitical Risk Index so interesting, not just 7 00:00:25,520 --> 00:00:28,320 Speaker 1: for tracking tension on the global stage, but also for 8 00:00:28,360 --> 00:00:31,520 Speaker 1: what it tells us about share market reactions. Diana Messina 9 00:00:31,600 --> 00:00:34,479 Speaker 1: is the deputy Chief Economist at AMP. Diana, welcome back 10 00:00:34,520 --> 00:00:35,000 Speaker 1: to Fear and. 11 00:00:34,960 --> 00:00:36,800 Speaker 2: Greed, Aysjon, great to be back. 12 00:00:37,159 --> 00:00:41,440 Speaker 1: First the background. How does the Geopolitical Risk Index work. 13 00:00:42,600 --> 00:00:48,480 Speaker 2: So, it's basically a tally of newspaper slash media articles 14 00:00:48,520 --> 00:00:52,919 Speaker 2: and mentions of anything related to geopolitical risks, So for example, 15 00:00:52,960 --> 00:01:01,600 Speaker 2: things related to defense, military missiles, defense spending, intervention, air strikes. 16 00:01:02,200 --> 00:01:05,399 Speaker 2: And what we tend to see is that when there 17 00:01:05,480 --> 00:01:09,000 Speaker 2: is some sort of geopolitical event like a missile strike, 18 00:01:09,880 --> 00:01:13,800 Speaker 2: an invasion of a country, even things like a nuclear disaster, 19 00:01:14,600 --> 00:01:18,559 Speaker 2: that index will rise on the day and vice versa. 20 00:01:18,640 --> 00:01:22,440 Speaker 2: So I think of it as like a concurrent indicator 21 00:01:22,520 --> 00:01:27,679 Speaker 2: of activity. It's not leading because how can you lead 22 00:01:27,760 --> 00:01:31,959 Speaker 2: a geopolitical event. It's basically impossible to predict what leaders 23 00:01:31,959 --> 00:01:33,959 Speaker 2: around the world are going to do when they go 24 00:01:34,120 --> 00:01:36,080 Speaker 2: to in beta country. I mean, sometimes we do see 25 00:01:36,160 --> 00:01:39,720 Speaker 2: markets actually anticipating conflict. We have seen that in recent 26 00:01:39,760 --> 00:01:41,920 Speaker 2: weeks with Israel and ran It. Sort of tensions have 27 00:01:42,040 --> 00:01:44,720 Speaker 2: been building over the past few weeks. At oil price, 28 00:01:44,800 --> 00:01:47,440 Speaker 2: it's been rising a little bit, but we don't know 29 00:01:47,480 --> 00:01:51,560 Speaker 2: where the actual event will happen. So the index basically 30 00:01:51,680 --> 00:01:55,320 Speaker 2: just rises and falls as events flare up and flare down. 31 00:01:55,840 --> 00:01:58,800 Speaker 1: So in a longer time skin so we talked about 32 00:01:58,800 --> 00:02:01,880 Speaker 1: the last couple of weeks. What's it done in the 33 00:02:01,920 --> 00:02:04,880 Speaker 1: last couple of years compared to that sort of post 34 00:02:04,960 --> 00:02:06,000 Speaker 1: GFC period. 35 00:02:06,200 --> 00:02:09,440 Speaker 2: Yeah, so the index has been running since about nineteen 36 00:02:09,520 --> 00:02:12,240 Speaker 2: hundred or we have data from that point, so we 37 00:02:12,280 --> 00:02:15,560 Speaker 2: do have quite a long series for it. Basically, after 38 00:02:15,960 --> 00:02:18,840 Speaker 2: nine to eleven we had a twenty year period of 39 00:02:19,240 --> 00:02:22,560 Speaker 2: quite low geopolitical risks. Then I guess that was sort 40 00:02:22,560 --> 00:02:25,760 Speaker 2: of the so called peace dividend after the Cold War, 41 00:02:26,280 --> 00:02:29,280 Speaker 2: and we did see some tensions flowing up and down. 42 00:02:29,320 --> 00:02:31,840 Speaker 2: For example, the trade war was trub one point zero, 43 00:02:31,880 --> 00:02:35,160 Speaker 2: we had Brexit. You know, those are still some geopolitical 44 00:02:35,160 --> 00:02:39,560 Speaker 2: events that did arise the index, but since twenty twenty one, 45 00:02:39,600 --> 00:02:44,280 Speaker 2: we have actually seen this continued increase in geopolitical risks, 46 00:02:44,600 --> 00:02:46,880 Speaker 2: and it sort of feels like that as well. We're 47 00:02:46,919 --> 00:02:49,000 Speaker 2: just reading the news, you sort of think, how is 48 00:02:49,040 --> 00:02:51,600 Speaker 2: all of this happening? Sort of seems a bit overwhelming, 49 00:02:51,639 --> 00:02:55,280 Speaker 2: But if you think about the tensions in the Middle East, 50 00:02:55,280 --> 00:02:57,000 Speaker 2: which have been going on now for a few years, 51 00:02:57,040 --> 00:03:02,480 Speaker 2: the Russia Ukraine wore, the trade war, the China Taiwan tensions, 52 00:03:02,520 --> 00:03:06,600 Speaker 2: the Hong Kong protests, of course COVID. There have been 53 00:03:06,680 --> 00:03:08,920 Speaker 2: a lot of events occurring in the last few years 54 00:03:08,919 --> 00:03:12,959 Speaker 2: which sort of make the global order seem a bit 55 00:03:13,000 --> 00:03:15,720 Speaker 2: more uncertaint And when I try to make sense of that, 56 00:03:15,800 --> 00:03:18,600 Speaker 2: I sort of think it makes sense in the environment 57 00:03:18,639 --> 00:03:21,359 Speaker 2: where you do have a lot more dominant players in 58 00:03:21,400 --> 00:03:24,720 Speaker 2: the global economy. For example, China is now the largest 59 00:03:24,720 --> 00:03:27,960 Speaker 2: economy on a purchasing power parity basis, surpassing the US. 60 00:03:28,600 --> 00:03:31,040 Speaker 2: It counts for about nineteen percent of world growth on 61 00:03:31,080 --> 00:03:34,720 Speaker 2: a PPP basis, versus the US at fifteen percent. So 62 00:03:35,160 --> 00:03:39,280 Speaker 2: we've moved into this multipole world basically from a unipole 63 00:03:39,320 --> 00:03:42,400 Speaker 2: world where the US was the sphere of influence, and 64 00:03:42,800 --> 00:03:46,119 Speaker 2: when that happens, you normally do tend to see geopolitical 65 00:03:46,200 --> 00:03:50,400 Speaker 2: risks flare up because every country has its own agenda, 66 00:03:50,600 --> 00:03:53,000 Speaker 2: and in particular the last years it has been about 67 00:03:53,080 --> 00:03:56,000 Speaker 2: tech and the tech race, and that's sort of part 68 00:03:56,040 --> 00:03:59,560 Speaker 2: of what the trade war between China and the US 69 00:03:59,800 --> 00:04:01,120 Speaker 2: is trying to solve. 70 00:04:01,880 --> 00:04:04,240 Speaker 1: How does that flow onto share markets? Is it possible 71 00:04:04,280 --> 00:04:08,240 Speaker 1: to look at the data on share markets post these 72 00:04:08,280 --> 00:04:11,880 Speaker 1: flare ups and see what markets have done? It is? 73 00:04:12,000 --> 00:04:14,839 Speaker 2: It is possible. I mean, it's difficult because you sort 74 00:04:14,840 --> 00:04:16,880 Speaker 2: of need to figure out a start date and an 75 00:04:17,000 --> 00:04:19,160 Speaker 2: end date to the conflict, and that is quite hard 76 00:04:19,279 --> 00:04:23,600 Speaker 2: and that is very subjective, and analysts try to do 77 00:04:23,640 --> 00:04:26,000 Speaker 2: that and that's why you always see different numbers from 78 00:04:26,040 --> 00:04:30,320 Speaker 2: different analysts about what the actual impact of a conflict 79 00:04:30,600 --> 00:04:35,039 Speaker 2: is on markets. So what we tried to do was 80 00:04:35,160 --> 00:04:37,760 Speaker 2: we looked at each event in isolation. We looked at 81 00:04:37,760 --> 00:04:39,839 Speaker 2: the rise and the Gyptical Risk Index. We tried to 82 00:04:39,839 --> 00:04:42,359 Speaker 2: look at the events that had the biggest impact the 83 00:04:42,360 --> 00:04:45,560 Speaker 2: geopolitical risk index, and we looked at what else was 84 00:04:45,560 --> 00:04:47,880 Speaker 2: happening around the time of that event. So, for example, 85 00:04:48,040 --> 00:04:51,680 Speaker 2: was the our recession, was there bad data? Was the 86 00:04:51,760 --> 00:04:54,200 Speaker 2: FED raising rates? Was FED cutting rates? So you need 87 00:04:54,240 --> 00:04:57,279 Speaker 2: to think about the economic environment more broadly the figure 88 00:04:57,279 --> 00:05:00,960 Speaker 2: out what the actual impact of that event was. Events 89 00:05:01,040 --> 00:05:04,159 Speaker 2: have different tidy impacts as well. In markets. Some events 90 00:05:04,320 --> 00:05:06,680 Speaker 2: are quite short lived, whereas other events are For example, 91 00:05:06,720 --> 00:05:08,880 Speaker 2: the First and Second World will obviously go for a 92 00:05:08,960 --> 00:05:11,360 Speaker 2: very long period of time to have much longer impact 93 00:05:11,400 --> 00:05:14,679 Speaker 2: on markets. Well, normally tends to happen though, is market 94 00:05:14,720 --> 00:05:17,760 Speaker 2: sets conflict. They tend to fall, then they bounce up, 95 00:05:17,880 --> 00:05:20,159 Speaker 2: and then they sort of the conflict might get worse 96 00:05:20,200 --> 00:05:23,159 Speaker 2: and then markets will fall even further. So when we 97 00:05:23,200 --> 00:05:26,599 Speaker 2: looked at the largest events really since the First World War, 98 00:05:26,640 --> 00:05:30,599 Speaker 2: we found that geopolitical events generally impacted markets by about 99 00:05:30,680 --> 00:05:34,160 Speaker 2: minus eight percent in the short term, but twelve months 100 00:05:34,200 --> 00:05:38,480 Speaker 2: after that event, markets were usually up by about fourteen percent. 101 00:05:38,560 --> 00:05:41,520 Speaker 2: So yes, geopolitical events have a negative short term impact 102 00:05:41,520 --> 00:05:45,440 Speaker 2: to markets, but generally share markets tend to recover twelve 103 00:05:45,520 --> 00:05:47,600 Speaker 2: months after the fact because there are other things that 104 00:05:47,680 --> 00:05:52,279 Speaker 2: are going on and the conflict is perhaps not work through, 105 00:05:52,720 --> 00:05:54,960 Speaker 2: but it's not as much of a big deal for 106 00:05:55,000 --> 00:05:55,719 Speaker 2: share markets. 107 00:05:56,080 --> 00:06:01,760 Speaker 1: Staying with me. Gianna will be back in a minute. 108 00:06:04,960 --> 00:06:07,040 Speaker 1: My guest this morning is down. I'm a Scena from 109 00:06:07,160 --> 00:06:13,440 Speaker 1: amp Okay, so I get where you're what you've said, 110 00:06:13,600 --> 00:06:17,080 Speaker 1: what I suppose the tricky bit for investors is that 111 00:06:17,120 --> 00:06:22,840 Speaker 1: you can't actually predict these geopolitical spats for one of 112 00:06:22,880 --> 00:06:26,200 Speaker 1: a better term. So how do you play the market 113 00:06:26,279 --> 00:06:29,360 Speaker 1: when you don't have that ability to predict it well? 114 00:06:29,400 --> 00:06:31,560 Speaker 2: The first thing to keep in mind is that it's 115 00:06:31,600 --> 00:06:35,440 Speaker 2: good to be diversified, especially if you know that you're 116 00:06:35,480 --> 00:06:39,800 Speaker 2: in for a period of heightened geopolitical uncertainin I think 117 00:06:39,839 --> 00:06:42,559 Speaker 2: that that is a period that we're in right now. 118 00:06:43,080 --> 00:06:48,279 Speaker 2: It's hard to see the geobilical environment getting easier or 119 00:06:48,320 --> 00:06:51,000 Speaker 2: better in the next few years because we are still 120 00:06:51,080 --> 00:06:53,279 Speaker 2: going to be in this multipole world. We do still 121 00:06:53,320 --> 00:06:56,040 Speaker 2: have these trade tensions going on, which means that we 122 00:06:56,080 --> 00:06:59,919 Speaker 2: are going to see more volatility in markets. Diversification is important. 123 00:07:00,560 --> 00:07:03,320 Speaker 2: You need to consider if capital growth is more important 124 00:07:03,360 --> 00:07:05,880 Speaker 2: to you as an investor or income, what is your 125 00:07:05,920 --> 00:07:09,360 Speaker 2: risk tolerance as well for that volatility. Do you want 126 00:07:09,400 --> 00:07:13,000 Speaker 2: to have an exposure to gold because usually gold does 127 00:07:13,040 --> 00:07:17,120 Speaker 2: perform quite well in times of geopolitical uncertainty. We used 128 00:07:17,120 --> 00:07:19,680 Speaker 2: to think of the US dollar US treasuries as being 129 00:07:19,760 --> 00:07:23,800 Speaker 2: with zade havens, but I think that that narrative has 130 00:07:23,840 --> 00:07:26,720 Speaker 2: also changed more recently because of what's happening in the 131 00:07:26,840 --> 00:07:29,960 Speaker 2: US and the US moving more internally and demand for 132 00:07:30,040 --> 00:07:33,720 Speaker 2: the US dollar going down. So if we know that 133 00:07:33,760 --> 00:07:36,720 Speaker 2: we're into this period of volatility, diversification is important, but 134 00:07:36,760 --> 00:07:40,520 Speaker 2: also holding more safe havered types of assets potentially like 135 00:07:40,640 --> 00:07:43,680 Speaker 2: gold or the Japanese Yet depends on your risk tolerance 136 00:07:43,920 --> 00:07:47,559 Speaker 2: as well, and then also knowing that if the share 137 00:07:47,600 --> 00:07:51,440 Speaker 2: market's fallen after a geopolitical event, don't pan it. It's 138 00:07:51,480 --> 00:07:54,640 Speaker 2: too late to sell out at that time. You basically 139 00:07:54,720 --> 00:07:57,440 Speaker 2: need to wait for the market to recover or potentially 140 00:07:57,480 --> 00:07:59,200 Speaker 2: it's even a good time to get back into the 141 00:07:59,200 --> 00:08:01,440 Speaker 2: market if that is your risk pose. Again, it depends 142 00:08:01,800 --> 00:08:05,600 Speaker 2: what stage of your life cycle you're at, what type 143 00:08:05,600 --> 00:08:08,720 Speaker 2: of investor you are. But if the share market's fallen 144 00:08:08,720 --> 00:08:12,400 Speaker 2: by five or percent after news of a conflict, I 145 00:08:12,400 --> 00:08:16,080 Speaker 2: wouldn't panic. It's obviously doesn't feel good and it's obviously 146 00:08:16,120 --> 00:08:18,920 Speaker 2: a big negative for civilians and from a more personal 147 00:08:19,000 --> 00:08:20,920 Speaker 2: point of view, but from a share mark point of 148 00:08:21,000 --> 00:08:23,400 Speaker 2: you it's not the right time to sell, because we 149 00:08:23,440 --> 00:08:26,080 Speaker 2: know that e actually markets d recover and over the 150 00:08:26,080 --> 00:08:27,720 Speaker 2: long term shares do go up. 151 00:08:28,520 --> 00:08:32,360 Speaker 1: Okay, that's a great rap. I'm wondering ten years time. 152 00:08:32,600 --> 00:08:34,840 Speaker 1: And the concept that I'm really thinking a lot about 153 00:08:34,880 --> 00:08:36,640 Speaker 1: here is the idea that we had the US as 154 00:08:36,720 --> 00:08:39,959 Speaker 1: the global power, and now we have in China are 155 00:08:40,040 --> 00:08:43,400 Speaker 1: purchasing power of parity bigger than the US, the whole 156 00:08:43,440 --> 00:08:46,600 Speaker 1: safe haven status of the US dollar. I don't know 157 00:08:46,640 --> 00:08:49,960 Speaker 1: where Europe fits into this, but potentially Europe rises as 158 00:08:50,000 --> 00:08:54,160 Speaker 1: a real power as well. This is an impossible question, Dana. 159 00:08:54,240 --> 00:08:57,480 Speaker 1: I accept that ten years time, though, what's it going 160 00:08:57,480 --> 00:09:00,360 Speaker 1: to look like. I mean, as an investor. In my 161 00:09:00,520 --> 00:09:03,160 Speaker 1: time growing up, kind of it's been US, US, US, 162 00:09:03,200 --> 00:09:05,800 Speaker 1: and if you're in doubt, go US. But what you're 163 00:09:05,840 --> 00:09:07,760 Speaker 1: talking about, that could all change. 164 00:09:08,600 --> 00:09:12,679 Speaker 2: So there is a difference, I think, between the investing 165 00:09:13,000 --> 00:09:16,319 Speaker 2: universe and then the economic universe. So from an investing 166 00:09:16,360 --> 00:09:18,080 Speaker 2: point of view, I think the next few years, the 167 00:09:18,200 --> 00:09:21,200 Speaker 2: US is probably still likely to dominate. The US still 168 00:09:21,200 --> 00:09:23,960 Speaker 2: has some of the best companies around the world. Corporate 169 00:09:24,000 --> 00:09:27,560 Speaker 2: earnings in those companies are still incredibly strong. Yes, investors 170 00:09:27,600 --> 00:09:30,360 Speaker 2: are feeling a bit more wary about the US dollar, 171 00:09:30,520 --> 00:09:33,520 Speaker 2: US treasuries potential taxation change as well, but at least 172 00:09:33,520 --> 00:09:36,200 Speaker 2: in the next five years, I do still think that 173 00:09:36,600 --> 00:09:40,000 Speaker 2: US equities can have pretty good returns relative to other markets, 174 00:09:40,000 --> 00:09:43,280 Speaker 2: although the US have actually underperformed relative to Europe and 175 00:09:43,280 --> 00:09:46,480 Speaker 2: even Australia this year. But over a longer term period, 176 00:09:46,520 --> 00:09:50,880 Speaker 2: I do think that Emerging Asia, emerging markets, China will 177 00:09:50,920 --> 00:09:53,880 Speaker 2: become more investable. A lot a lot of investors have 178 00:09:53,960 --> 00:09:56,800 Speaker 2: fleed from China in the last few years since COVID, 179 00:09:56,840 --> 00:09:59,839 Speaker 2: thinking the Chinese share markets too volatile, but over the 180 00:09:59,880 --> 00:10:02,720 Speaker 2: l long term China could look more investable emerging market. 181 00:10:02,800 --> 00:10:08,360 Speaker 2: Similar potentially opportunities in Africa. If Europe gets productivity growth 182 00:10:08,440 --> 00:10:11,440 Speaker 2: going and gets out of this doldrum of growth that 183 00:10:11,520 --> 00:10:14,840 Speaker 2: has been in for the last ten fifteen years, Europe 184 00:10:14,960 --> 00:10:18,560 Speaker 2: has quite good opportunities as well. And for domestic investors. 185 00:10:18,559 --> 00:10:21,200 Speaker 2: Of course, there's always that domestic bias because of things 186 00:10:21,200 --> 00:10:23,840 Speaker 2: like franking credits. So basically I think that over the 187 00:10:23,840 --> 00:10:27,640 Speaker 2: long term we're going to move away from America first 188 00:10:27,840 --> 00:10:30,640 Speaker 2: dominance in the investing world, and in America to be 189 00:10:30,679 --> 00:10:32,720 Speaker 2: a bit more balanced around the rest of the world. 190 00:10:33,080 --> 00:10:34,839 Speaker 1: Diana, thank you for talking to Fear and Greed. 191 00:10:35,040 --> 00:10:35,560 Speaker 2: Thanks El. 192 00:10:35,920 --> 00:10:39,000 Speaker 1: That was Diana Messina, Deputy Chief Economist at AMP. This 193 00:10:39,160 --> 00:10:42,280 Speaker 1: is the Fear and Greed Business Interview. Remember we are 194 00:10:42,320 --> 00:10:44,679 Speaker 1: not an investing podcast. You should always get your own 195 00:10:44,720 --> 00:10:47,640 Speaker 1: financial advice before making any investment decisions. Join us every 196 00:10:47,640 --> 00:10:50,000 Speaker 1: morning for the full episode of Fear and Greed. This 197 00:10:50,240 --> 00:10:53,200 Speaker 1: is news you can use. I'm China alma I. Enjoy 198 00:10:53,240 --> 00:10:53,520 Speaker 1: you today.