There’s a fresh game board in global politics. We are witnessing the cementation of two prominent geopolitical and economic alliances. One led by the Western nations and the other steered by China and Russia, both blocs locking horns in intensifying competition. The resultant fragmentation has brought about a significant dip in geopolitical cooperation, catalysing a cluster of more decisive, multi-aligned nations to rise in importance.
Historically, the impact of geopolitical events on markets and economies have been transient, according to our analysis of 68 risk events since 1962. However, this trend has shifted, as outlined in our 2023 Q2 Outlook update, in the new, increasingly volatile regime. The Blackrock now regards geopolitics as structural market risks with profound, enduring effects.
In the coming year, we anticipate strategic competition to be the primary driver of geopolitical landscape, throttling economic efficiency and growth. The Blackrock Geopolitical Risk Indicator, which monitors market sensitivity to geopolitical risks, remains in proximity to its historical mean. Given the plethora of risks looming, we propose that the potential market impact of geopolitical events might be underestimated by markets.
This month’s crucial insights comprise:
• The U.S.-China strategic competition risk rating remains high on our radar following Beijing’s Two Sessions, President Xi Jinping’s visit to Moscow and the Taiwanese president’s U.S. tour. We perceive the course of U.S.-China relations as increasingly negative, posing considerable risks for investors.
• We continue to rank the probability of Gulf tensions high. The potential revival of diplomatic ties between Saudi Arabia and Iran could bolster regional stability. However, Iran’s nuclear programme has escalated the risk of a military showdown in the Middle East to its highest point in nearly a decade.
• We uphold our high likelihood rating for the Russia-NATO conflict. With Russia and Ukraine both launching spring offensives, we see no immediate resolution. There exists a significant risk of escalation in this, the most perilous standoff between the West and Russia since the Cuban Missile Crisis.
Bear in mind that scenarios are hypothetical and don’t represent all possible outcomes. Moreover, market movement analyses do not constitute recommendations to invest in any specific investment strategy or product.