Global political risks push investors to bulk up cash defenses

Wed Feb 24, 2016 1:29am EST
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By Saikat Chatterjee and Nichola Saminather

HONG KONG/SINGAPORE (Reuters) - With the threat of a UK exit from the European Union no longer just a distant prospect, already battered investors are shoring up defensive positions against a host of intensifying geopolitical risks, including a "Brexit".

Investors typically dismiss political gyrations as sideshows that might cause temporary market turmoil but with little long-term impact.

However, with markets volatile and assets from developed market equities to emerging market bonds a sea of red, the unusually high number of geopolitical risks stalking investors this year could expose already bruised portfolios to further losses.

"When you look into 2016, the one thing very clear is there are more fat tail risks out there than we've seen for a long time," said Paul O'Connor, co-head of multi-asset at Henderson Global Investors in London. Across most Henderson funds, cash levels as a percentage of total assets are in the mid-teens, he said.

A fat tail risk refers to the higher-than-normal likelihood of an otherwise unusual event that would lead to extreme movements in returns, technically more than three standard deviations from the mean.

Current key risks include the UK leaving the euro zone, South China Sea tensions, Middle East conflicts, falling oil prices, the European refugee crisis and a highly uncertain U.S. Presidential race.

Crucially, tail risks are growing at a time when global growth concerns and recent market dislocation have made investors crowd into a small number of trades, notably long U.S. dollar, short oil and emerging market positions.

That means tail risk events could spark a dramatic unwinding of these positions as large numbers of investors seek to sell at the same time.   Continued...

A British Union flag flutters in front of one of the clock faces of the 'Big Ben' clocktower of The Houses of Parliament in central London, Britain, February 22 , 2016.  REUTERS/Toby Melville