Lessons for market drawdowns
Stephen Anness, Head of Global Equities, shares some lessons learnt from the previous drawdowns we’ve experienced in order to help investors navigate the ongoing market volatility.
15 April 2025
Article
Geopolitics vs. fundamentals: The tug-of-war in equity markets
25 March 2025
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.
Figure 1: Historical data shows the typically fleeting impact of geopolitical events on equity returns
Sources: Robert Shiller, Haver Analytics. Data as of December 31,2023. Note: Return refers to price return. Geopolitical events in the above chart refer to 36 events selected from 80 years of geopolitical events beginning with Germany’s invasion of France in 1940 and ending with the war in Ukraine in 2022. We measured the 3-month, 6-month and 12-month returns following these events. Past performance does not predict future returns.
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. Joe Dowling is a fund manager within the Henley-based Global Equities team.
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Footnotes
S&P 500 Index Standardised rolling 12-month performance (% growth)
Standardised rolling 12-month performance (% growth)
31.12.19
31.12.20
31.12.20
31.12.21
31.12.21
31.12.22
31.12.22
31.12.23
31.12.23
31.12.24
S&P 500 Index
16.3%
26.9%
-19.4%
24.2%
23.3%
Source: Bloomberg as at 12 March 2025. Indices are not directly investable. Past performance does not predict future returns.
Sources: 1 How do geopolitical shocks impact markets? | J.P. Morgan Private Bank U.S.
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