Central banks and geopolitical risk dominate investment markets
Luca Paolini, Pictet Asset Management
Do central bank actions or geopolitical developments have a greater impact on markets?
The perpetual wrestling match between geopolitical developments and pronouncements of central bankers is one of the defining developments of the current era in investment markets.
“A dropped word from a central banker dwarfs the economic impact of horrendous geopolitical spikes in tension,” says Iain Tait at London & Capital.
Some observers feel there is now a heightened risk of policy error, with far too much faith placed in the skills of central bankers, with a dangerous complacency setting in.
But other leading voices believe there is an excessive focus on central bankers, and that it is the collective consciousness which transmits financial sentiment, rather than officials at the head of institutions with interest rate cuts or rises.
“There is a tendency in the news media to over-focus on central banks, where somebody in charge of a central bank becomes a celebrity at this point in history. The news media can’t resist it,” according to Nobel prize-winning economist Robert Shiller, speaking at the recent Amundi forum in Paris.
What the Fed will do over the next two years is pretty much irrelevant, unless there is a big policy mistake
“Markets are affected by ideas spreading from person to person, by word of mouth. What I am talking about is sociological movements with no personalities, which is more difficult to write about.”
There is also a feeling at Swiss bank Pictet that central bankers’ contribution to growth is over-estimated. “What the Fed will do over the next two years is pretty much irrelevant, unless there is a big policy mistake,” says Luca Paolini, chief strategist at Pictet Asset Management. “The only big risk is that they are too late in hiking rates. They know what they are doing.”
Bigger risks for investors and asset allocators today come from elections and other geo-political events, especially in China, he says.
“Investors must now be aware of all regional elections and political events, even in Greece,” says Mr Paolini. “They must pay more attention to the political events of distant countries as this is where the risks to their investments will come from.”
