Book Review: Geopolitics for Investors

Geopolitics for Investors. 2015. Pippa Malmgren.

A consultant on foreign affairs and national security issues, Pippa Malmgren focuses on international relations as determinants of investment behavior in Geopolitics for Investors. Central to the book is her contention that understanding how geopolitics influences investment behavior requires some mastery of the subject of geopolitics itself. History’s lessons are critical to a full comprehension of what moves markets. Yet, the author observes, investment managers seem to consider the need for critical thinking in this area less important than in other aspects of their analysis.

According to Malmgren, investment organizations commonly rely on quick access to ready sources of information on geopolitics, either in- or outsourced, instead of studying reams of data as they would before taking a position in a company, industry, or sector. This assertion seems too broad a generalization. Developing a deep knowledge of geopolitics may not be commonplace in smaller firms with limited resources, but it is most assuredly part of the mandatory skill set in a larger, global wealth management shop.

Still, today’s high degree of market interconnectedness and rapidity of capital movement across time zones argue for a greater level of preparedness for geopolitical developments at wealth management shops that want to stay competitive. To be sure, geopolitical risks can be difficult, if not impossible, to quantify. Until now, there has apparently been no readily available compendium on the subject — hence, the publication of Geopolitics for Investors. It is a welcome contribution, but with some caveats.

Much of the book is a backgrounder on foreign policy, statecraft, and world order, rather than a guide to their application to money management. This material is necessary for investors who need to master the rudiments of the subject, but they will find it difficult to extract relevant information that is directly usable in the investment process. Chapters on the definition and history of geopolitics shed light on its relevance to investment decision making, but the examples provided are widely scattered. The chapter “Weighing and Measuring” is a welcome how-to, but it does not appear until midway through the book. Subsequent chapters revert to bigger-picture discussions of the significance of world order and the workings of statecraft, with additional shortcomings. Only near its conclusion does the book attempt to focus in earnest on how investors can apply geopolitics in an investment context. For example, the chapter “Practical Applications” instructs the investor on both how and how not to use geopolitical insights. Even in these chapters, the discussion is a bit heavier on political economy and international affairs and lighter on their relevance to investment management.

Notwithstanding the book’s overreliance on background, it has merit as a succinct, nuanced, and thoughtful exposition of geopolitics for the less experienced investor as well as the seasoned professional desiring a brief refresher. The author does a good job of illustrating geopolitics through the prism of current-day events. She adduces examples of the ascent of ISIS (Islamic State of Iraq and Syria), Russia’s incursion into eastern Ukraine, and the increasingly fissiparous tendencies of the European Union, as well as developments involving the world’s existing financial architecture. These events did not come about by happenstance but, rather, resulted from long-standing tensions.

Malmgren notes that geopolitics, like the financial markets, can be shaped by mean reversion. Such observations are welcome and quite pertinent but all too infrequent. The occasional use of color-coded cartograms effectively illustrates fault lines and potential concentrations of geopolitical risk around the globe, providing useful context for the risk manager. The fact that many of the bibliographical references are older underscores the long tradition of scholarly interest in geopolitics, despite the accumulated knowledge never before being presented in actionable form for investors. Malmgren’s work in itself is not a panacea, but it does provide a helpful impetus for further discussion and research.

More book reviews are available on the CFA Institute website or in the Financial Analysts Journal.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.