Withum Wealth Minute: Navigating Geopolitical Waters

In the complex tapestry of global financial markets, geopolitical events often appear as stark threads, weaving through the fabric of the markets with unpredictable outcomes.

As investment advisors, understanding the nuanced interplay between geopolitics and market dynamics is crucial for guiding our clients through turbulent waters. In this article, we’ll seek to demystify the often-perplexing reactions of financial markets to geopolitical events and provide insights into how we incorporate geopolitics into our investment calculus.

According to a Natixis SA survey published in December, geopolitical tensions were the foremost risk to the global economy and financial markets heading into 2024. The poll of 500 institutional investors found that “the biggest macroeconomic risk for 2024 is geopolitical bad actors who with one action can upset economic and market assumptions globally,” outranking risks like declining consumer spending, central bank policy missteps, and a weakening Chinese economy.[1]

At first blush, it certainly looks like global tensions are abnormally high. Hamas’ Oct. 7 attacks and Israel’s retaliation brought geopolitical risks back to the forefront for many. The Houthis’ recent attacks in the Red Sea pose a threat to 30% of global container shipping. The War in Ukraine is well into its second year, and investors continue to monitor China’s ambitions. Respondents to the Natixis survey also pointed to fragmentation between the BRIC grouping — Brazil, Russia, India and China — and the West. There is also concern about the growing alliance between Russia, North Korea, and Iran, which 70% believe will lead to greater economic instability. Markets are also on edge ahead of key elections this year, including in the US.

How do we reconcile these myriad risks with an equity market that’s bumping up against all-time highs? History can help. After the beginning of the War in Ukraine in 2022, Glenview Trust Co Chief Investment Officer Bill Stone examined how the market moved after 29 different geopolitical crises starting with WWII. He found that on average, stocks were higher three months after a geopolitical shock. After 66% of events, they were higher after just one month. There are certainly exceptions (see 9/11), and shocks often bring additional volatility, but overall, history seems to suggest that stock declines associated with geopolitical fears are often “a temporary setback and an opportunity to buy at discounted prices.”[2]

Source: Glenview | (Geopolitical Events And Stocks)

Stone acknowledges that this conclusion seems a bit crass given the immeasurable human toll of the events we’ve been euphemistically referring to as “geopolitical shocks”.  As investment advisors, taking the emotion out of investing – our own and our clients’ – is one of the most challenging and important parts of our job. As such, we take a systematic approach when we consider geopolitical risks, balancing the need for vigilance with the recognition that not all geopolitical events will have a lasting impact on market fundamentals.

What does that nuanced process look like? Keeping abreast of geopolitical developments is crucial, but it’s equally important to analyze their potential market implications critically. Distinguishing between short-term noise and events with long-term economic ramifications is key.  The same can be said for diversification — we employ geographic diversification to mitigate the impact of regional geopolitical risks. We also seek to maintain flexibility in our investment approach, allowing us to adjust to geopolitical events, if necessary. This may involve shifting allocations towards more defensive assets or sectors less susceptible to geopolitical upheaval. Perhaps most importantly, we encourage clients to maintain a long-term investment perspective. While geopolitical events can lead to short-term market volatility, the underlying fundamentals of well-chosen investments often prevail over the long term.


[1] https://www.im.natixis.com/us/resources/2024-institutional-outlook-full-report#:~:text=Looking%20at%20the%20next%2012,economic%20and%20market%20assumptions%20globally.

[2] https://www.reuters.com/markets/asia/live-markets-what-history-says-about-geopolitics-market-2022-02-18/