Investors must wake up to risk

Investors have rarely been this relaxed. The Vix index, known as the fear gauge of the US stock market (because it reflects the price of options that investors use to insure their portfolios against sudden swings), recently hit lows not seen since 2007.

Back then, of course, investors were enjoying the calm before the credit-crisis storm. But it’s not just economic turbulence that markets often fail to factor in. As we noted earlier this year, for instance, the Dow had decided by late 1938 that Hitler’s invasion of Austria was no cause for concern.

And today there is a growing list of geopolitical problems threatening to shake the markets out of their complacency.

At the top of the list is the renewed violence in Iraq as the insurgents of Isis have taken over much of the north of the country. The Sunni-Shia split in the Middle East, inflamed by the “blundering interventions of the Western powers”, is starting to look like a new Thirty Years’ War, reckons Economist.com’s Buttonwood blog.

With years of instability looming, oil prices, which have already ticked up in the past week, could spike higher: of the ten countries with the largest oil reserves, six are in the Middle East. Higher oil prices have been behind many global downturns, starting with the 1973 embargo.

Then there’s the Ukraine crisis, of which the Moscow stock market “has been itching to erase all traces”, says Pierre Briançon on Breakingviews. The Micex index is not far off its early January level. But Russia has just cut off gas supplies to Ukraine, showing that “hopes of a normalisation of the situation are premature at best”.

Investors should also keep a closer eye on mounting tension between China and other Asian countries over islands in the South China Sea, as Andreas Unterberger points out on Ortneronline.at. War in the region may not be the most likely scenario, but it can hardly be ruled out.

Moving down the list, the protracted crisis in Thailand is taking a growing toll on the economy. Terrorism has flared up in Nigeria and Kenya and there are signs of potential political and economic instability in Brazil and Turkey.

Yet, despite all this, the Vix is still under 13, “a reading that implies calm, rather than concern”, says Randall Forsyth in Barron’s. It’s time the markets woke up.

Merryn

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