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]
