The CBOE Volatility Index (VIX), or the so-called “fear index,” barely budged in the wake of the American capture of Venezuelan president Nicolas Maduro and the price of oil didn’t move too much either. Meanwhile, stocks didn’t move too far in either direction despite President Trump’s bold military move.
For their part, financial advisors seem similarly unalarmed by the President’s interventionist action at least when it comes to their portfolios.
“This development does not materially change how we think about geopolitical risk, but it reinforces an existing view. We are already in a period of deglobalization, with a higher baseline risk of geopolitical conflict and policy-driven disruptions than markets appear to be pricing,” said Austin Graff, chief investment officer at 49 Financial.
Graff said he addresses this enlivened political environment through diversification and explicit volatility hedges rather than attempting to forecast specific events.
“In our view, the Venezuela action is unique given the country’s large oil reserves and long-standing sanctions on its energy sector. Sanctioned oil has historically traded at a steep discount, benefiting countries willing to accept it—primarily China, India, and Turkey—by lowering input costs for economic growth. We believe that removing or constraining black-market oil supply reduces that advantage and creates a more level competitive landscape across global economies,” Graff said.
Along similar lines, Spencer Carlson, managing partner at Chappell Wealth Management, a partner firm of Sanctuary Wealth, says Maduro’s arrest does not materially change how he thinks about geopolitical risk. In his view, evidence-based portfolio construction principles apply regardless of whether the country experiences geopolitical conflict.
“The primary goal of sound portfolio construction is to reduce idiosyncratic risk, and in a geopolitical context that means avoiding over-exposure to any single country or regime. Global diversification should already be in place, even when the world appears relatively calm. In that sense, the hard work is done before events like Venezuela unfold,” Carlson said.
All that said, Mike Martin, vice president of market strategy at TradingBlock, believes the Venezuela action does indeed add tail risk to an already shaky geopolitical landscape.
“In the short term, markets have reacted positively, but this may prove short-lived as the underlying realities set in,” Martin said, adding that he still does not believe current geopolitical risks warrant a change to pre-existing allocation strategies as the countries involved play a “relatively small role” in portfolios on an asset-allocation basis.
And Nate Garrison, senior vice president and chief investment officer with World Investments, says the recent military actions justify his already cautious positioning regarding increased geopolitical disruption.
“In environments like this, we think the benefits of broad diversification outweigh the potential alpha opportunities from concentrated allocations in a few asset classes and sectors, and that’s something we’ve been practicing in our portfolios already over the past year,” Garrison said.
Garrison believes the bigger geopolitical risk right now is an invasion of Taiwan by communist mainland China. In his view, the recent U.S. actions in Venezuela may provide the government of mainland China more cover to make that invasion happen sooner rather than later.
“Any military takeover of Taiwan would result in a massive disruption to global commerce and financial markets. There is a risk that asset prices will be sharply negatively impacted,” Garrison said.
WHAT ABOUT OIL & OIL STOCKS?
While the Venezuelan intervention may eventually lead to a re-orientation of global oil markets, advisors say it is far too early to identify clear fundamental winners. For now, the more immediate impact appears to be on sentiment, as many investors had largely written off energy equities prior to recent developments.
“There has been speculation that Venezuelan heavy crude could compete with Canadian oil supplied to U.S. Gulf Coast refineries. While directionally reasonable, Venezuela’s degraded infrastructure could mean it would likely take many years—and tens of billions of dollars in investment—for this to become a material factor,” Graff said.
Over the long term, Graff believes this scenario would likely be a net negative for Canadian producers selling into the Gulf Coast and a net positive for U.S. refiners, but the timeline for fundamental impact is measured in years, not quarters.
According to Chappell’s Carlson, greater U.S. involvement could influence energy markets, but both the direction and magnitude are highly uncertain.
“I’d be skeptical of anyone claiming clarity here. When geopolitical developments intersect with commodities, the crystal ball is hazy,” Carlson said, adding that the “most reliable way to make an investing mistake after a geopolitical shock is to overreact.”
Emphasized Carlson: “Advisors should focus on clearly explaining what is known, acknowledge what isn’t, and reinforce that market outcomes are often unknowable and counterintuitive. Remaining committed to a well-constructed, individualized plan is critical. Volatility and surprise were known risks when portfolios were built; it’s the price of admission for long-term returns.”
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