Most people these days seem to feel rather anxious about “the state of the world”. There appears to be so much conflict going on in various places making it sometimes unsettling to watch the nightly TV news. So perhaps it’s worth trying to ascertain where these geopolitical risks and tensions fit into the historical context.
According to a Geopolitical Risk Historical Index utilised by Amundi, a European asset manager, which measures geopolitical risk since the early 1900s, the 2020s so far seem to rank ‘middle of the pack’ when compared to periods in history facing high or low geopolitical risk.
Interestingly, the level of risk calculated for the first few years of the 2020s is comparable to that seen throughout the Cold War, roughly from the 1950s to the 1990s. A period characterised by the rivalry between two superpowers (the US and the Soviet Union) that is to some extent comparable to today’s environment shaped by US-China tensions. Spikes obviously occurred during the two world wars (1914-1918 and 1939-1945).
We observe from the data below that the 2020s are likely to remain a period of elevated geopolitical risk. Since Russia’s invasion of Ukraine, more countries are contributing to driving geopolitical risk. NATO has been enlarged with new members. Hamas’ October 7 attack on Israel, the Israeli response, and the subsequent involvement of many different (and also new) actors in the ensuing tensions in the Middle East further accentuate these dynamics. Iran, North Korea, Venezuela, failed states in the Sahel region of Africa, and tensions over Taiwan, all contribute to the sense that geopolitical risks are increasing.
Some global fund managers and research houses look very closely at geopolitical risks and attempt to forecast trends. The Amundi Investment Institute has constructed a “geopolitical sentiment tracker” (GST) and attempts to use this information to predict markets.
Of course, today’s tensions are in many respects consequences of developments of prior decades. For example, 9/11 and the GFC laid the foundations for many of the political realities we see today in the Middle East and within Western democracies, such as Brexit and the rise of Trumpism.
When we look at the 2020s, the impression that emerges is that the number of crises with global impact, and the pace at which they occur, are accelerating:
- the COVID-19 pandemic led to the break-down of global trade ties;
- Russia’s invasion of Ukraine caused major ruptures between traditional allies;
- the Middle East crisis is threatening to draw Iran, Israel and the US into a bigger war.
Some even talk of World War III having already started.
As investors, what to make of all this? It’s hard to know. Bear in mind that although geopolitical crises can have long-term economic and financial consequences, the usually negative reaction of equity markets is often short-lived. Of course, history can help understand the present and even sometimes inform the future, but no one should have too much faith in their crystal ball.
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