A money manager at $2.5 trillion State Street lays out an investing opportunity that just opened up — one that's outlived major political scares throughout history

Lori Heinel Top 100

  • Geopolitical tensions around the world have generated an
    unprecedented degree of uncertainty around the economic fallout of
    those events.
  • Lori Heinel, the deputy chief investment officer at $2.5
    trillion State Street Global Advisors, broke down research
    revealing the investing opportunities that lie ahead, and told
    Business Insider where investors should be putting their
    money. 
  • Visit
    BusinessInsider.com for more stories.

From Brexit to the
US-China trade war,
there are enough political standoffs taking place right now to keep
stock-market investors worried about worst-case outcomes.

But instead of focusing on spikes in volatility or guessing how
these issues get resolved, investors should instead be thinking
further out into the future, according to
Lori Heinel
, the deputy chief investment officer at State
Street Global Advisors, a $2.5 trillion asset manager. 

When it comes to war or the threat of war, it’s a lot harder to
try to price outcomes or hedge against risks, Heinel said. That’s
because severe escalation could lead to very binary outcomes —
especially if nuclear warfare is in the cards. 

These days, the big geopolitical threats investors face are far
less existential, but the consequences investors fear the most are
more
economic in nature
. By one metric — the Global Economic
Policy Uncertainty Index — market
participants have never been more worried about the economic impact
of political events. 

The good news is that there would be a direct market benefit if
these issues are satisfactorily concluded.  

“Presuming that some of these things get resolved in ways that
aren’t worst-case scenarios, we actually think that the markets
could go higher from here,” Heinel told Business Insider by
phone. 

But don’t only take her word for it. In-depth research conducted
by State Street showed that after major geopolitical shocks, US
stocks were mostly higher by the year after. 

Screen Shot 2019 04 15 at 10.51.56 AM

State Street also looked into the performance of international
stocks because many geopolitical shocks are global in nature.

Another benefit of examining global stocks is that at any given
time, the S&P
500
‘s level reflects a plethora of non-political data
points.

State Street consequently examined the performance of non-US
MSCI indexes, but screened only for countries that met four
criteria: sufficient liquidity, a free-floating exchange rate, a
lack of commodity-price-driven volatility, and sufficient
geopolitical exposure to global investors. The four emerging-market
countries that made the cut were India, Israel, South Korea, and
Turkey. 

Read more:
A stock picker who’s dominating 92% of his peers breaks down his
market-beating strategy — and reveals 5 stocks he loves, even as
earnings growth dries up

On average, these four markets experienced a 2% decline in the
month after negative events. But in the year that followed, they
had rebounded by nearly 13%.

The chart below further illustrates this outcome by showing the
weighted market outcomes in these four markets after positive and
negative shocks. 

Screen Shot 2019 04 15 at 8.45.17 AM

“The other way to think about this higher geopolitical risk is
the market is effectively commanding a risk premium to deal with
the geopolitics,” Heinel said.  

As investors wait with bated breath for the resolution of
geopolitical tension, at least one market already holds promise in
Heinel’s view: European stocks, if Brexit reaches a satisfactory
conclusion. 

The question of what areas of the world are attractive was
easier to answer a few months ago before stocks rebounded from
their late-2018 correction and became more fully valued, Heinel
said. She still favors US stocks, however, believing that the
combination of tax reform and corporate earnings growth will
provide a stronger boost relative to the rest of the world.  

SEE ALSO: Bank
of America scoured hundreds of mutual funds with $1.5 trillion in
assets and identified 7 neglected stocks poised to surge after
crushing earnings


Join the conversation about this story »

NOW WATCH:
The founder and CIO of $12 billion Ariel Investments breaks down
how his top-ranked flagship fund has crushed its peers over the
past 10 years

Source: FS – All – Economy – News
A money manager at .5 trillion State Street lays out an investing opportunity that just opened up — one that's outlived major political scares throughout history