Geopolitics vs. fundamentals: The tug-of-war in equity markets

In the volatile world of equity markets geopolitical events create headlines that can drive short-term turbulence in markets, however company fundamentals ultimately steer long-term share price trajectory, and long-term minded investors can take advantage of these temporary dips to buy high-quality stocks at a discount.

Navigating geopolitical turbulence

From wars and elections to trade disputes and diplomatic spats, these events can send shockwaves through stock markets, causing short-term turbulence. Recent political events and announcements by the US government such as changes in tariff policies and territorial issues, have been prime examples of this. However, seasoned investors know that while geopolitics can impact markets in the short run, it's the company fundamentals that ultimately steer the long-term trajectory of share prices.

Geopolitical events have a knack for grabbing headlines and causing immediate market reactions. Take, for instance, the oil embargo of the 1970s, the fall of the Berlin Wall in 1989, or more recently, the Brexit referendum in 2016. Each of these events triggered significant market volatility. Investors, driven by fear and uncertainty, often react impulsively, leading to sharp declines or spikes in stock prices.

While geopolitics can cause short-term market jitters, company fundamentals are the true north for long-term investors. Our investment process is based on the deep analysis we conduct on fundamentals such as earnings growth, revenue, profit margins, and cash flow, as we believe these are the bedrock of a company's value. This is our everyday focus and ultimately where we believe our time is best spent: our ability to predict the outcome or longevity of the next US government policy initiative is limited, but we believe our ability to analyse companies and identify attractive businesses, where the intrinsic worth of the company is not reflected in the share price, is much better.

Strategic investing in volatility

Take Next as an example. Due to the political turmoil of "Trussonomics" the stock value fell. Having followed Next for years and recognising it as a well-managed company, we took advantage of the situation to invest. As politics stabilised and fundamentals regained focus, the share price recovered, allowing us to exit with a positive return.

Businesses such as Microsoft, LVMH or Old Dominion Freight have weathered numerous geopolitical storms over the decades. These businesses have not thrived because they were immune to geopolitical risks but because their strong fundamentals—innovative products, robust growth, and solid management—have consistently driven their long-term performance.

A study by J.P. Morgan¹ analysing over 80 years of data found that while geopolitical events can have profound impacts on local markets, they rarely have lasting effects on large-cap equity returns. The study showed that six months to a year after a geopolitical event, market returns are often indistinguishable from periods without such events.

Turning turmoil into opportunity

For long-term active investors, like ourselves, a sell-off caused by geopolitical sentiment can present a tremendous opportunity. When markets react irrationally to geopolitical events, stock prices often fall below their intrinsic value. Long-term minded investors can take advantage of these temporary dips to buy high-quality stocks at a discount. As the market stabilises and fundamentals reassert themselves, these investments can yield substantial returns.

So, the next time a tweet from the US administration sends shockwaves through the market, remember the wise words of Benjamin Graham: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” Focus on the fundamentals, and you'll be well-equipped to weather any storm.

Stephen Anness is head of the Henley-based Global Equities team and manages multiple portfolios in the global equity income & growth strategy and Joe Dowling is fund manager for the Henley-based Global Equities team.