Understanding geopolitical risk is important in a world that has become more closely intertwined thanks to rapid advances in communications and the rise of globalization. It also can have a direct relationship to the amount of risk investors are willing to take. Geopolitics is defined as the study of how geography and economics influence politics and the relations between countries. A familiarity with geopolitical issues can help an investor by preventing her from making a rash decision that could prove to be expensive. As an example, Frances Donald, a senior economist with Manulife Asset Management, pointed to Brexit, the name given to a referendum held in Britain in 2016 where a majority voted to exit the European Union.
Frances Donald: When I talk to our clients, what I try to emphasize to them is that long-term, it is really those supply and demand fundamentals that are going to move the market over the 10 to 20-year period. What we need to watch out for is short-term volatility created by geopolitical events – Brexit being one of the best examples of this. We saw a referendum result that moved the markets violently for about three days. And then subsequently over the following weeks, all of those losses were unwound. So getting a sense of which of these two geopolitical risks is going to have shortened impact and which ones are going to have long-term impact is very important.