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INVESTING/PORTFOLIO STRATEGIES

CFA Institute: 70% of investors expect geopolitical events to hurt returns

More than two-thirds of investment professionals across the globe expect the changing geopolitical environment to compromise investment returns for the next three to five years, said a survey by the CFA Institute.

A survey of 1,428 investors Feb. 6-13 found 70% of respondents expect these changes to negatively affect returns. However, 71% of portfolio managers responding to the survey said they have not changed their strategy as a result of the U.K.'s decision to leave the European Union in June.

The survey was taken by 143 U.K.-based investors, 295 from other EU countries, and 990 from the rest of the world.

U.K.-based investors are particularly concerned about Brexit's impact on the U.K. financial market, with 70% viewing Brexit as having caused the competitiveness of the U.K. market to deteriorate. When asked to assess the relative attractiveness of international financial centers, respondents identify London as the biggest Brexit loser, while Frankfurt, Dublin, New York and Paris are considered to be the biggest winners.

Almost three-quarters of respondents from continental EU countries expect firms in their market to reduce their U.K. presence as a result of Brexit. The vote is also set to spark further exits from the EU, with 59% of respondents believing further exits are likely. A wholesale disintegration of the EU is expected by 36% of respondents, up from 21% when the CFA Institute conducted a similar survey in July 2016. A breakup of the U.K., caused by a yes vote to a new Scottish independence referendum, is considered probable by 53% of respondents.

Regarding other political risks, 67% of investors said the election of Donald Trump as president of the U.S. was the political risk with the biggest impact on investment strategy. The upcoming French election was cited by 10% of respondents to be the most significant political risk.

“The current state of political uncertainty ahead of Article 50 being triggered is having a clear impact on investment professionals' market expectations,” said Paul Smith, president and CEO of the CFA Institute. “That said, it is important to remember that geopolitical risk is by no means new: Apart from the 20 years following 1989 and the fall of the Berlin Wall, geopolitical risk has in fact been a constant feature of financial markets. It is also only one of many challenges and potential drivers of change in the investment industry.”He said it is crucial for investment management professionals to “earn the trust of investors” in the uncertain geopolitical climate.