Geopolitical Alpha

Chapter 2The Constraint Framework: Three Pillars

In the finance world of 2020, politics matter. However, investors still disagree whether political research gives them an edge in terms of performance. Some remain skeptical, while others merely use geopolitics as a retroactive excuse for poor performance.¹

The criticism I've heard most often is that “political analysis is a nice-to-have, but it is not a must-have.” It is marginal to the decision-making process – at best, a handy tool when an exogenous event threatens one's strategic decisions. Another way to put it is, “We will cry geopolitics when something blows up, just so we have a scapegoat to blame for our faulty predictions.”

My answer to this view is: “Don't bother. When something blows up, buy everything.”

Other than the 1973 Yom Kippur War, few geopolitical events since the Second World War have been disastrous for the markets (Figure 2.1). That near-perfect predictability is why this book is not about Black Swans or hoarding gold for an impending apocalypse.² It is about incorporating geopolitical analysis into your investment process, as you would any other macro factor.

Geopolitics Is Not a “Nice-to-have”

In 2011, I arrived in Montreal to start a job at the world's oldest and most-respected independent investment research firm: BCA Research. Since 1949, BCA Research has offered its clients an interesting proposition: getting the macro forces in the economy right is more effective than trying to pick individual ...