Geopolitical tensions from the rise of ISIS to Russian aggression present what one consultant calls a global instability premium that could drive strategic institutional investment allocations to non-U.S. assets.
“The global instability premium is the result of political instability in the world, causing investors to overallocate to safe harbors, creating opportunities in other allocations” in other regions, said Eric J. Petroff, president of Petroff Institutional LLC, Seattle, a consultant to institutional investors and money managers.
In addition, Mr. Petroff said, “We're in this period of massive amounts of monetary policies that has to be reversed. That is a source of instability.”
Mr. Petroff laid out his concept in a paper, “The Global Instability Premium,” posted March 11 on the Enterprising Investor blog of the Charlottesville, Va.-based CFA Institute.
Speaking about the global instability premium, James W Paulsen, Minneapolis-based chief investment strategist, Wells Capital Management Inc., said: “I think there is a lot of validity in it.”
“There will be times that the premium exists,” Mr. Paulsen said. “Right now, that is exactly what I'm doing. I'm looking to capture a perceived reduction in the global risk premium. If ... the global risk premium diminishes, you will outperform.”
But others don't agree that such a specifically defined premium exists or that a concept of instability should trigger allocation shifts.
“From the standpoint of being a long-term strategic investor, we don't take a tactical approach exploiting these short-term variations” in value, said Dennis D. MacKee, communications director of the $181.6 billion Florida State Board of Administration, Tallahassee.
“If you are a long-term investor, you ride through instability,” he said.