The quip “the only constant is change” may need a corollary for 2016: with constant change comes increasing risk.
The evolving geopolitical climate is contributing significant risk to the financial industry from unanticipated sources, Ian Bremmer, CEO of New York-based risk consultant The Eurasia Group, told advisors on Thursday at the 2016 TD Ameritrade National LINC conference in Orlando.
“For the past 50 years, if you had wanted to you could have simply discarded geopolitical risk when it happened,” Bremmer said. “Any time you saw the Chinese and Americans rattling sabers around Taiwan, and the Taiwanese markets wend down, that should have been a buy signal, because the markets were going to go back up. You could do that for every geopolitical risk for the last half century. The bad news is you can no longer do that.”
Bremmer predicts a more fragmented world throughout 2016 and beyond as the political order that led to decades of relative stability collapses.
The most concerning news in the near term, Bremmer says, is the likely fall of the Saudi Arabian monarchy.
“I don’t know what keeps the Saudi government in place,” Bremmer says. “We have $35 oil, the one thing that has kept Saudi Arabia together is their ability to take money out of the ground and give it to their population, and they can’t do it anymore, let alone fund 15,000 Saudi royals.”
The pressure of low oil prices is contributing to a deteriorating situation in the Middle East. Bremmer says the Saudis’ recent execution of a prominent Shi’ite cleric started a snowball effect.
“Iran was bitterly upset, they stormed the Saudi embassy,” Bremmer said. “This was two weeks before the implementation of the Iran nuclear deal, it was literally the worst possible time for Saudi Arabia to escalate if they cared about the reactions from Americans and Europeans. Then they called their allies on the Gulf Cooperation Council to cut relations with Iran, and you know who did it? Bahrain, Sudan, and Djibouti. That’s not much of a portfolio. Saudi Arabia has become isolated because they can no longer write checks.”
The sectarian strife in the Middle East has overtaken the Israeli-Palestinian conflict as the prime source of political and economic disruption in the region.
Geopolitical risk matters, Bremmer said, not just for world leaders, but also for investors, advisors and asset managers. “When geopolitics don’t’ matter, we take on more risk and we focus more on growth, when they matter more, we focus on resilience and stability.”