Turmoil in the Middle East has led to spiking oil prices and sent financial markets reeling recently, a combination of events that should underscore the rapidly rising importance of political risk for investors in an increasingly interconnected world.
But despite the resurgent impact of local politics on world markets, Wall Street isn't well-equipped to analyze political risk -- and understandably so. Most traditional investors, after all, have focused on evaluating the relative merits of different U.S. stocks, rather than, for example, the internal dynamics of the Libyan regime.
So earlier this week, DailyFinance sat down for an interview with Ian Bremmer, president of The Eurasia Group, a leading political risk consultancy. Bremmer dissected some of the most salient developments and trends taking shape across the world, cutting through the generalizations that often enshroud them.
Welcome to a 'G-Zero' World
The toppling of Egyptian dictator Hosni Mubarak led to plenty of euphoria about the prospects for reform in the Middle East. But investors should hardly be surprised that the task of ousting Moammar Gadhafi in Libya is proving far more onerous, given the vast institutional differences between the two societies.
Skittish oil markets now seem to anticipate massive unrest in Saudi Arabia. But those fears, says Bremmer, are vastly overblown. So are worries that other authoritarian societies like China, a cornerstone of the global economy, will experience big upheavals.
The international community, meanwhile, is scrambling for ways to react to Libya. French proposals for targeted air strikes and heated U.S. debates about the feasibility of imposing a no-fly zone have dominated recent headlines.
Investors shouldn't hold their breath for quick fixes, Bremmer said. With global powers focused on their own internal problems, he says, a "G-Zero" world is emerging in which international consensus and coordination will be more difficult to muster then they have been in the past.
Beware of Generalizations
While the world may be growing more chaotic, it's also finding major new drivers of economic growth in rapidly rising emerging markets. Investors, though, should try to be more discerning about the prospects for different countries rather than reaching for blanket generalizations.
Seemingly reasonable categorizations of countries potentially poised for rapid growth like the Next 11 have garnered plenty of popularity. But investors should be aware of the vast differences that exist among these countries. Look beneath the surface before jumping in.
Today's rapidly shrinking world offers more opportunities for investors than it used to -- and more pitfalls. The trick, as always, remains being able to differentiate between the two.
Introduction to ETFs
The basics of Exchange Traded Funds and why ETFs are hot.View Course »