Investment tactics & market timing: The world is ending - what now?

Before we turn to the Economico core concern – the interest-preserving and cost-efficient implementation of the investment strategy – in the following flashes, we look in Flashes 27 and 28 at the periodic adjustment or rebalancing of the investment strategy. Should this be done actively or passively based on rules?

When – as is currently the case again – the prophets of the end of the world are booming, panic spreads across global stock markets. Is this panic justified? In this flash, we examine the relationship between geopolitical crises and the short- to medium-term return behavior of the global equity market.

The level of geopolitical crises is measured using the «Geopolitical Risk Index» (GPR), as shown in the chart of the week. This index represents a consistent and near real-time indicator of geopolitical events as perceived by the press, the public, investors and political decision-makers.

In the last five crises – with the exception of the war in Ukraine – the global equity market suffered significant losses within a month. However, with the exception of 9/11 and the Ukraine crisis, the global equity market subsequently turned positive again. It should be noted that 9/11 (dotcom crisis) and the Ukraine crisis (global inflation surge) were accompanied by developments in the real economy that were not or only partly directly related to the crisis event.

Market participants therefore seem to systematically overestimate crisis events, which leads to market overreactions that later correct themselves. However, if a geopolitical crisis has real economic consequences – which is entirely possible in the current tariff crisis – it can also leave lasting damage on equity markets.

Due to the observed tendency of markets to overreact, the rule of maintaining the investment strategy even during crises is advisable. When advising institutional investors, we recommend a rule-based rebalancing of the current allocation back to the investment strategy when (generously defined) bandwidths are breached. This also keeps the transaction costs caused by rebalancing within narrow limits.

Providers offering services on Economico are free to decide how they ensure ongoing rebalancing to the investment strategy in discretionary mandates. Most providers also use fixed rebalancing rules. This is a topic worth discussing in more detail during the onboarding discussion with the selected provider.