linked to terrorism have increased by 1

Managers must deal with atypical events, whose consequences are difficult to assess, and even more to anticipate. War, terrorism or elections sometimes burst brutally in the daily life of investors, including in emerging markets, with significant effects on their portfolios. The unique geopolitical risks with which they must learn to deal.

Wars and conflicts

The war is not only economic: 112 conflicts (wars, insurgencies...), including 84 domestic and 28 international dimension, occurred between 1974 and 2004. Only 1 in 5 has had a significant effect (positive or negative) on international stocks (MSCI World index), according to a study (1) of two economists at the Federal Reserve of Saint Louis: 11.2 of those conflicts have had a negative impact on international capital markets and 6.7 a positive effect. The less affected (negatively) is the United Kingdom, and then the France, the Japan and the United States. Wall Street is also the market growing more frequently (12.4 of the cases) in the phases of conflict. National stock markets tend to move more frequently that they fall during the conflict. Indeed, it is often in the period before the awards to suffer the most, in view of the uncertainties surrounding the outcome. Such was the case before the war of Iraq in March 2003, where markets were under pressure and then climbed in view of the low resistance by the Iraqi army, which left there in theory a short war.

These are the international conflicts (positive and negative) effect on the stock market than the clashes that take place within a single country. The case of the France is exemplary in this area. Only 1.5 of domestic conflict took down the Paris stock exchange, as was the case with 16.7 of the international "clashes" geopolitical consequences and dimensions always more difficult to apprehend.

Zone of conflict, almost a quarter of the "hostilities" that occur in Asia have a negative impact on international actions. The percentage is only 11.8 for those involved in Europe. Africa is a particular case. Markets are more frequently that they fall when conflicts occur on this continent. Wall Street is the market the most penalized by turbulence in the Middle East, so that the conflict in the rest of the world (Europe, South America...) tend to raise the US actions. Investors may tend to favour the largest stock market in the world in these situations of tension.

60 of the Middle East conflict have an impact on the oil, but more often, to lower (40 of cases) rather than ride (20). The fear that black gold production is affected, which would increase the barrel, seems finally somewhat exaggerated.

Terrorism: the cost of protection of portfolios

The terrorist attacks have greatly increased in the world since 2004. Between 1994 and 2005, it is the Iraq which has experienced the largest number of terrorist attacks, more 300, or nearly a quarter of the total identified by "Terrorism." This country is followed by the India (14 of the attacks), Israel (8), Afghanistan (7) and Colombia (6). With financial consequences for corporations. Costs, direct (premium...) and indirect (an increase of oil...), linked to terrorism have increased by 1.6 to 2.8 of revenues between 2001 and 2006, according to a study from Duke University in association with the CFO magazine. Recent work (2) evaluated the impact time but for investors.

Andrew Karolyi, researcher at the University of Ohio, has evaluated each company of the & Standard Poor's 500 exposure to "terror", built on the presence of its activities and subsidiaries in countries who have been victims of terrorist attacks. Overall, this exposure to terror index increased sharply: it has been multiplied by 10 between 1995 and 2005. Companies that display the highest scores are usually groups of larger size than the others, present at the international, and oriented on growth. Examples: companies operating services to companies such as Deluxe Corporation or Cendant, or telecommunications (Qualcomm) appear high.

A portfolio of companies more exposed to terrorism was a performance similar to that of a portfolio including little exposed businesses. The sign that investors are now not really paid, or little enough to hold titles with a terrorist risk. This risk is still ignored by the market, that has been difficult to apprehend him and measure.

For additional evidence, the researcher has designed this time an "anti-terror"which excludes us companies operating in countries suspected of terrorism and portfolio located on the black list of the US Department of State (Sudan, Northern... Korea). This portfolio generates no performance very different from that of the rest of the market. The exclusion of the riskiest companies reported no more it costs. Some funds are not yet invest in "hot" areas of the world (see box opposite).

Majority changes and elections

Policy to invite sometimes in the calendar of the markets and in the agenda of managers, with for example, held a very indécises elections to the United Kingdom in the very next days. For investors, it is a source of additional uncertainty, reflected by an increase in the volatility of the awards, reveals a study (3). It went through the impact of the parliamentary elections on 27 stock markets of the major countries of the OECD. The "national" component of the volatility of these different indices may double in the week around the elections. (Deducted from the price of options) implied volatility is at 31 five days before the election and climbs to 55 five days after. It is still a fortnight once returning past. This suggests that markets generally have great difficulties to correctly anticipate the outcome of the elections. Various scenarios help to increase the ambient nervousness and maintain volatility: an unexpected change of parliamentary majority, a narrow victory, therefore questionable, one of the two camps or even the inability to form a stable government.

All industries are not affected by the political turpitudes of their country. These are labour-intensive sectors and those very oriented towards exports including volatility increases the more years elections or when political uncertainties are strong. A change of political majority can translate into significant regulatory developments in right to work or trade and the country's strategic policy. Hence a source of particular uncertainty. On the other hand, the large multinational groups and their volatility, are not affected by the outcome of the elections held in their respective countries.