By Thomas Kostigen
Where your investments are located increasingly matters. And we aren’t talking about which vehicle, brokerage, bank, or institution houses your assets. No, we are talking about where—geographically—the companies or funds in which you are invested are located.
Natural disasters, political upheavals, and other acts that pose a risk to business operations can weigh mightily on stock market performance. For example, Verisk Maplecroft, a global risk consultancy that publishes risk analysis across the political, human rights, and environmental spectrum, looks at more than 150 kinds of risks that can affect companies, from civil unrest to water stress and deforestation among many others. It says that 84% of the world’s fastest growing cities face extreme climate change risk.
“The scale of the risk could threaten the capital flows that have streamed into these markets to take advantage of burgeoning economies, emerging consumers and cheap labour,” Veris Maplecroft says in its report. “At the other end of the spectrum, 86% of the 292 ‘low risk’ cities are located in Europe and the Americas.”
Many investors woke up to the risk of environmental events on their portfolios in 2011, when floods in Thailand crimped the stock prices of numerous computer suppliers. Dell saw more than five percent shaved off its market cap and Marvell Technology reported lost $175 million in revenue. Hewlett-Packard and other technology companies also traded down due to the floods.
Extreme weather is poised to get more extreme. Events resulting in billion-dollar economic losses have become more frequent over the past few decades. And according to at least one major study, extreme events could increase fivefold in certain parts of the world. “Overall, up to 60 percent of locations across North America, Europe, East Asia and parts of southern South America would likely see at least a threefold increase in various extreme events,” according to the study’s forecast.
As wildfires rage in northern California, Brexit teeter totters the performance of companies with exposure to the United Kingdom, riots plague Hong Kong, and torrential rain and floods in Japan caused flights delays and business shutdowns in recent weeks, there is good reason to not only check where the companies in your portfolio are based, and also where their major suppliers are on the map.
The most damage to businesses over the last 30 years has been done by tropical cyclones, with nearly a trillion dollars of losses reported. Is your portfolio overly exposed to the East Coast?
California wildfires have caused more than $40 billion of damage over the last two years alone. Power shutoffs are dimming homes and shuttering businesses. Have these travesties found their way into your holdings? International stocks, especially in the emerging markets, suffer the most from external risks. And Africa has the most exposure, according to Verisk Maplecroft. But one of the many fallouts from Brexit is that major companies have packed up and moved their headquarters elsewhere. So Europe is not immune to serious operational risks, either. The lesson is that every continent has businesses at risk. A good financial adviser will monitor and keep track of your holdings — for both stock market risk and physical harm.
Thomas Kostigen is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.