One of the biggest short-term risks to investor portfolios at the moment is the number of regions currently involved in military or civil conflict. Apart from the tensions between Japan and China, one of the biggest fears for investors is full-scale warfare between Iran, Israel and the prospect of the US being dragged into another battle in the Middle-East.
Geopolitical consulting firm STRATFOR sent out a flash-note to subscribers this morning noting interesting troop movements from both French and US military assets including:
- 13 September: A dozen MC-130H, HC-130N, HC-130P and AC-130U military transport planes and gunships crossed the Atlantic Ocean heading east
- 20 September: Reports of a major minesweeping exercise in the Strait of Hormuz
- 24 September: Aircraft spotters 12 U.S. Marine Corps F/A-18 Hornet fighter jets arriving in two waves at Moron air base in Spain
- 24 September: French-language newspaper Le Figaro, said some 100 French special operations troops had been deployed in the sub-Saharan region to counteract militants in northern Mali
- Late September: Italian journalist Guido Olimpio reports an increasing number of US unmanned aerial vehicles in Libya
While these developments are not indications of imminent warfare breaking out, investors should be aware of these developments as this is likely to indicate risk is rising in the region.
Short-term investors will want to keep their eyes on the VIX (Volatility Index) as the real pre-cursor to significant tensions. The VIX (November contract) has averaged around 18, down from around 22 for the same period last year. Put in context this was around 30 in June 2012.
Some trading strategies to consider for higher risk environments include:
- Keeping “dry powder” in your wallet means that you can take advantage of short-term sell-offs. Keep your eye open for high-quality equities with limited exposure to higher risk regions
- Familiarise yourself with the use of commodity and currency products – gold appears to have solid fundamentals behind it with a combination of “QE3”, a weak dollar and as a hedge against investment risk
- Finweek recommended the Standard Bank Africa Commodity Index Exchange Traded Note (ETN) as a useful product for the current market. Since November the last year, the product has returned nearly 20% despite a volatile overall market