Why peace equals profits

Steve Killelea, the man behind the Global Peace Index, explains its potential value in helping make investment decisions.

After making a lot of money launching then listing two successful IT companies, Steve Killelea set up a charitable foundation dedicated to helping eradicate “poverty and conflict through humanitarian relief, development assistance and the pursuit of peace”.

As he recently explained in a speech to an Association of Superannuation Funds of Australia (ASFA) conference (of which NAB was a major sponsor), Killelea observed that the world’s poorest countries also tended to be its most conflict-ridden. He began wondering if there was “something I could learn from the world’s most peaceful countries, to bring back to the [development] projects I was doing”.

It was at this point he discovered there was no index of peaceful countries or even a solid definition of what peace consisted of.

Killelea decided to do something about this and set up a think tank – the Institute for Economics and Peace. Every year since 2007, this think tank, in consultation with an international panel of peace experts and using data collected by the Economist Intelligence Unit, has released the Global Peace Index (GPI). The GPI ranks 163 independent states and territories according to their levels of peacefulness. (Peacefulness is measured on 23 metrics, including a nation’s internal and external conflicts, levels of violent crime, military expenditure as a percentage of GDP, and prison population.)

Investing in political stability

Killelea is a businessman, one who continues to play a leading role in a venture capital fund he founded. Though it’s not the primary purpose of the GPI, he points out that knowing how peaceful a country has been, and whether it’s becoming more or less peaceful, is helpful in making investment decisions.

And Killelea provides a couple of real-world examples. First, he notes that after “doing a whole lot of regression” on the data collected to compile the GPI, it was discovered that countries with improving levels of peace over the last 12 years “had two per cent higher GDP growth rates”.[i] This makes intuitive sense given peaceful high achievers such as Iceland, New Zealand and Denmark “have never had a genocide [and] regime change is very rare”.

Peaceful countries tend to have a virtuous circle of factors – well-functioning government, high levels of human capital, low levels of corruption and a free flow of information (interacting), which results in a sound business environment. To put it more starkly, investors don’t usually need to worry about a coup resulting in widespread nationalisation or debt defaults in nations that are peaceful, or even just becoming more peaceful.

Second, peaceful countries are resilient, which means even if they do suffer an economic misfortune, they bounce back quickly.

Killelea offers the example of Iceland, which has been ranked the world’s most peaceful country for the last seven years.

“Iceland was the country most affected by the global financial crisis; it effectively went bankrupt,” he says. “Iceland then moved on from the [GFC] mess in four years and paid its IMF loans off early. As The Economist put it, [Iceland] was both the greatest disaster of the global financial crisis and the fastest recovery.”

Reliable modelling?

Peace is unevenly distributed. Some nations have a lot while others, particularly in parts of the Middle East and Africa, have very little. Complicating matters for investors (such as Australian super funds) even further, peace doesn’t always correlate neatly with economic potential. Both China and the United States, for example, have only mid-range GPI rankings. Nations such as India, Israel, Russia and Saudi Arabia are at the back of the pack.

Three observations can be made about this, according to Killelea.

First, he points out that investing in a rapid transit system or R&D is usually a more productive use of a nation’s capital than building a frigate or more prisons. That, however, doesn’t mean Lockheed Martin or Serco are bad investments. If certain parts of the world are seeing more conflict – and this is something the GPI measures in a granular fashion – defence contractors and private prison operators may provide excellent shareholder returns.

Second, investors can look at GPI trend lines to make a more informed decision about whether or not to invest in a rapid transit system in, for example, East Timor. Killelea, a frequent visitor to the country, notes it has blossomed since gaining independence, with “hotels and shopping malls” popping up throughout Dili over the last decade. Probably not coincidentally, East Timor has been climbing up the GPI rankings. It is now, Killelea notes, “one of the more peaceful places in Asia”.

Third, the GPI can act as a useful barometer when other indicators may be providing an excessively positive or negative picture of a nation or region’s economic future.

The current standout example of this is the United States. While its economy is growing strongly and Trump’s tax cuts are likely to accelerate that growth, Killelea is worried it’s becoming a less peaceful country (in contrast to China). The GPI provides a wealth of data showing Americans are becoming more inclined to believe “the system is corrupt” and demonstrating less “acceptance of the rights of others”.

Using the example of the Arab Spring, which was sparked after a street vendor who could no longer make a living set himself alight, Killelea cautions that feedback loops mean a nation or region can reach a tipping point with unexpected speed. And that can be a tipping point investors fail to see coming, especially if they haven’t been paying attention to the GPI.