The effective hedging of an investment portfolio determines the success of any financial firm.
But effective hedging in today’s ever more interconnected world requires increasingly more sophisticated multi-factor analysis that itself greatly depends on the availability and quality of the accessible data - and on how to properly interpret what the data reveals.
Among the many key factors considered by a financial analyst, geopolitical events and their influence emerge as highly relevant parameters. The outcomes of presidential elections, for example, are among the most pivotal events to be considered within a geopolitical analysis.
Making decisions based on anticipated outcomes of these elections is no doubt a risky endeavor, especially in cases where the competing candidates support very different policies for their nations.
In 2024 alone, about 50 countries have held presidential elections, all of which must be tracked in order to make reliable estimates of the varying effects that each candidate’s victory could have on present and future investment decisions, as well as on existing investment portfolios.
This myriad of possible outcomes requires constant attention for global portfolio managers and may require a significant investment in time and data gathering and analysis. In such cases, analysts can take steps to simplify their work without compromising its reliability by conducting analyses using additional information factors calculated in a standardized manner across multiple nations.
This methodology makes the information easier to interpret and more universally acceptable (e.g., calculation of international reserves in a central bank and conventions to calculate a nation’s true gross domestic product).
It is far better than merely considering local-specific data (e.g., political party agreements, legal conventions, and tax regimes); data that is often narrowly verifiable and difficult to extrapolate into the global picture.
One of the shortcomings of relying solely on local-specific data is that merely selecting a set of variables that can be corroborated by most investors in a costless manner may not be sufficient to mitigate the uncertainty about the volatility of a portfolio’s value and the spillover effects across other investments that can change depending on the outcome of a presidential election.
Analysts must accept the reality that political changes are autonomous variables that do not necessarily conform to predictive patterns.
What this means is that a change in political leadership can generate policy changes that result in extreme volatility in the performance of an economy - This is especially true in supersized states in which the average public expenditure of developed nations can surpass 40 percent of their GDP.
The challenge for the analyst therefore is to determine the global impacts, as well as the local impacts, of changes in political leadership, as such changes most certainly impact the direction of global markets.
It is wise then to choose mitigants of risk that transcend the influence of short-term political decisions, and can earn the trust of a broad number of investors across the globe.
Given these realities, there are relatively few optimal assets that protect an investment portfolio against political risk. However, gold, and gold-backed tokens, emerge as the optimal asset in such a climate, because the price of gold is internationally agreed upon, without political interference and moreover, gold is universally accepted without the need of specialized investors.
Gold retains its intrinsic value without any need of securitization (as is the case for other real-world assets).