Geo-Financial Risk as Investment Strategy

The events of end-2019 and start-2020 leading to escalation in the Middle East have heralded a reminder that the impact of geo-politics incurs geo-financial risk. In terms of ever-present global investment strategy implications, the knock-on impact is real and telling.

Naturally, forex and commodity markets are the first to respond – directly affected assets in geographically-sensitive locations also. Risk-reward strategies are by nature double-edged, but unless the assessment of salient factors is precise, the overall strategy becomes overly generalised and risk elements overlooked, and, by association, opportunities missed. Some will look to respective parties for input on a prospective way forward – US or Iran allies, or the UN, or signatories to the JCPOA, or Iran Nuclear Deal of 2015 – namely, China, Russia, France, UK and, of course the EU.

But what is critical, particularly in the wake of secondary US Sanctions policy which integrates major offence types including broad money laundering offences – is that even indirect contagion is a problem. Investments in geographies, jurisdictions, entities, asset classes, financial instruments with only seemingly tangible ties to known, US-designated “rogue” elements become an even more acute problem when escalation occurs. Naturally, investment opportunities are created as a result of this.

The principal actor of influence in strategic and geo-financial risk terms is the US – with a pre-eminent currency which is the transactional and reserve currency of choice the world over. As an example the ramifications of the failed JCPOA cannot be overstated. The EU claimed great foreign policy landmark success for its input – yet from an Iran and US perspective, the EU’s position is hopelessly ineffective and nonsensical.

As senior US experts have pointed out, US policy on Iran is unchanged since the days of Carter. What the world has to wake up to now – and there is every evidence that this will not be the case – is that direct links to Iran will not be sufficient to ward of major US Sanctions enforcement threats. The third party nature of US Sanctions and the skill with which entities have been able to obfuscate their commercial activities with US-designated parties mean that US-Iran escalation will lead to even more US Sanctions violations – and major fines or exclusions from the US market.

With the likes of Angela Merkel and Mahathir Mohamed trying to pretend that US Extra-Territorial powers do not apply, and the EU issuing Blocking Statute notices of intent to try and thwart US cross-border powers (none of which have been effective since 1996), there is bound to be continued confusion. Let us not forget – major EU nations were dependent on Iran for trade and energy resources – along with the likes of Russia, Ukraine (hence the urgency from Germany and the EU to step up Nordstream 2 and TurkStream Russia-Turkey pipelines. The problem: these countries or key parties are all US-designated.

If global investors pretend that they can ignore the strong arm of US enforcement – for cross-border probes from the US always involve both categories, they will be left like the Nordic banks. In the Nordics, it is abundantly clear that US Sanctions and AML enforcement is neither understood nor factored in. Which is why you find Nordic analysts and market experts proclaiming “Buy” and “Outperform” ratings on the likes of Danske Bank, Swedbank and SEB whilst completely disregarding, in their coverage and overall analysis, the impact of a major US Sanctions and AML (money laundering) probe, and eventual – massive – fines.

This is mind-numbingly dangerous and short-sighted as a strategy – and entirely misleading to investors. The outcome of disregarding true geo-financial risk? Massive class action stakeholder lawsuits from non-Nordic (usually, but not exclusively, US) investors such as ADR holders, accusations of deliberately misleading the market, conflicts of interest from the likes of US SEC and FINRA – as it becomes abundantly clear that there is no “independent” feed from market experts on the names covered, as major US Sanctions implications such as Magnitsky are conveniently disregarded as irrelevant.

The outcome is plain for all to see – share prices down, “market expert” share target prices way up in some cases – off the scale – and investors losing a great deal of money over 6, 12, 18 months. Whilst local Nordic funds pile in to Nordic names in the vain hope of “propping up” the shares while the rest of the world is in full “short” mode. The Nordic banking investment issue plays into the Russia, East European US-designated nexus. US-Iran escalations will need to be carefully monitored as global investors seek a sensible strategy to avoid unwanted US enforcements.

Lest Geo-Financial Risk/Reward be misconstrued as “…all things US…”, consider other geographies, jurisdictions. Japan, France, EU – Nissan/Renault and Carlos Ghosn (the so-oft mis-coined “Brazilian” – in reality a leading Lebanese business mogul) – the aftermath of which will undoubtedly be headed for Hollywood scriptwriters – and attendant investment impact. (“Big Autos Play Becomes Hollywood Blockbuster Play…?) EU Anti-Trust influential moves on major US tech – not necessarily in financially damaging, but more operationally damaging, terms – are another example. Or the telling impact on Rolls-Royce (involving action by US, Brazil, UK), GlaxoSmithKline (action by China, UK) – in multinational efforts.

The impact of Investor action and US Sanctions enforcement is sizeable. Money laundering fines are of a completely different order, and the continued ineffectiveness of the OECD’s FATF producing multiple evaluations with no effective robust deterrent action means that money laundering offences can continue unabated. Yet this robust approach by the US gives way to many opportunities that are not always detected – in more safe haven areas and geographies. Or simply a more realistic geo-financial risk-reward assessment of emerging opportunities, hedging strategies, and so on.

Aside from the very obvious areas affected by geo-political escalation, there are many opportunities opening up for investment if the real-time paradigm of geo-financial risk versus geo-financial reward is applied. Which means factoring in all of the ramifications of US Sanctions and strategic efforts, as well as those of Iran and its proxies. Unilateralism is somewhat fading in the throes of ever-present populism – so broad brush approaches to investment are far less effective than surgical investment strikes which get to the core of an investment opportunity in a more holistic and real-time assessment.

It is held in some investment quarters that exogenous effects have little fundamental impact on intrinsic value. There is no doubt that the ever-present geo-financial risk/reward paradigm of today means that all factors need to be taken account of. With investor sentiment an increasing factor in the binary response times of social media – sometimes viral – interplay – and little any restriction can effectively do to break down the fast exchange of global communication – all meaningful factors play into the investment decision-making armoury.

Geo-financial risk-reward matters, and hiding away behind valuation methodologies which disregard key factors is no longer relevant. Where geo-political becomes geo-financial – and this is/is not taken into account – investments suffer or benefit accordingly.