REIGATE, England — The risk of terrorism has not been fully priced by global markets, said Roger Urwin, global head of investing consulting at Watson Wyatt Worldwide.
The recent foiled terrorism plot in London, the Israel/Hezbollah conflict and the war in Iraq have focused new attention to the link between geopolitical issues and global equity markets, consultants and fund managers said.
"There's increasingly room for smaller groups (of terrorists) to use technological advances to increase bargaining power. This is a new factor in the marketplace," said Mr. Urwin at Watson Wyatt Worldwide in Reigate. "These smaller groups can be more influential in the world now than any other era. As a result, it has become more expensive for more developed nations to defend (national and economic interests) against such difficult-to-locate threats. We've seen this recently in the supply and demand in oil."
Mr. Urwin said downside risks might not be fully priced in global markets, and that's bound to attract more attention as these markets become more correlated.
"As the world moves at some pace toward a greater globalized state, we think it is more important than before to seriously consider macro issues," said Mr. Urwin, who has analyzed the link between variables such as geopolitical risks and equity returns for Watson Wyatt's Thinking Ahead Group.
A clear understanding of how geopolitics drive the global equity markets will allow fund managers "opportunities to exploit longer-term thinking" by establishing exposure in certain asset classes such as commodities ahead of other investors, Mr. Urwin said.
For example, five years ago, many managers would have been uncomfortable investing in oil commodities because of the instability in the Middle East. But for those investors who had understood global economics and politics, "stepping away from the consensus and positioning themselves ahead of the game" could have paid off handsomely, Mr. Urwin said.
Similarly, determining whether this trend has been fully priced into the current market will help investors in the coming years.