Little Market Reaction in a World of Risk

Nouriel Roubini

Geopolitical risks have claimed the world’s attention over the past few years, and even as some recede, others have emerged to take their place. According to Nouriel Roubini, co-founder and chairman of Roubini Global Economics, the market reactions to these new risks range from complacent to downright bubbly.

Roubini believes that one of the more serious geopolitical risks today is the challenge of sustaining a peaceful rise for China’s economy. An expanded naval presence is necessary to support China’s economic aspirations, “but what China considers a defensive imperative could be perceived as aggressive and expansionist by its neighbors,” he writes. Meanwhile, Asia is seeing the rise of more nationalistic political leaders in a region where there has been, and continues to be, little cooperation among countries. Roubini feels that these tensions define China, and Asia in general, as a “global ground zero.”

The timing of the US Federal Reserve’s exit from monetary easing is another source of risk. Investors and governments worry that the Fed may cause a financial shockwave by raising policy rates too quickly, and Roubini shares their concerns. He has argued that the Fed should delay any rate increases until global economic conditions have stabilized, in order to avoid another failed economic policy movement.

Major emerging countries are also in trouble,” warns Roubini. “Of the five BRICS economies (Brazil, Russia, India, China, and South Africa), three (Brazil, Russia, and South Africa) are close to recession.” While he acknowledges that economic conditions have improved for some of the global emerging markets, Roubini thinks the factors that had supported these economies in the past — China’s economic expansion, low US interest rates, and a global demand for raw materials — have reversed themselves.

Finally, Ukraine conflict remains a serious risk. Roubini states that Vladimir Putin’s long-term objective is to rebuild Russia “in some form, perhaps as a supra-national union of member states like the European Union,” and that this union must, of necessity, “include Ukraine, Russia’s largest neighbor to the west.” The sanctions imposed by the US and Europe may simply reinforce Russia’s conviction that its future lies not in the West, but in this separate union in the East. Roubini expects that tensions with the west will “shift Russia’s energy and raw-material exports — and the related pipelines — toward Asia and China.”

In September 2014, Roubini noted that reaction from the markets had been muted in spite of these tensions, with falling oil prices, global stock markets reaching new highs, and long-term bond yields down in most advanced economies. He described it as rational complacency, writing that “the more generalized contagion to global financial markets that geopolitical tensions typically engender has failed to materialize.”

However, in a more recent discussion about the Bank of Japan’s decision to increase the scope of its quantitative easing, Roubini warned that global markets may be seeing another round of currency wars. Other central banks in Asia have started easing monetary policies, or will ease more in the future. While this may not lead to a full-blown financial crisis, policy reactions around the world could continue to have negative effects on economic growth. “In a sense,” writes Roubini, “we are all Japanese now.”

At the Sixth Annual CFA Institute Middle East Investment Conference, Roubini will discuss geopolitical developments and their potential effects for investment portfolios. You can register to attend the event to hear him in person, and follow this blog for more details as the conference draws closer.

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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