Rising geopolitical risk is not automatically bad news for risk assets, but, as Richard Turnill explains, BlackRock believes a new U.S. approach to trade bears watching.
The economy is expanding, equities are at new highs, and markets appear calm. What is there to worry about?
Geopolitical risks are ticking up, according to our BlackRock Geopolitical Risk Indicator (BGRI). But this isn’t automatically bad news for markets.
The BGRI gauges the degree of financial market concern about geopolitical risk. It tracks the frequency of geopolitical risk mentions in media and brokerage reports, adjusting for sentiment reflected in the text. A positive score indicates markets appear more concerned about geopolitical risks relative to recent history, whereas a negative score implies less concern.
The BGRI is now at the highest level since March 2015, and well above early 2017 levels, when markets were digesting Donald Trump’s election win, worrying about the French election outcome and fearing the potential for a hard Brexit.
How worried should we be about the recent BGRI uptick?
The indicator is still well below its longer-term peak, as the chart above shows. But we believe risks such as a more muscular U.S. approach on trade bear watching.
Trade is the risk to watch
Sudden geopolitical shocks tend to hurt global risk assets only briefly if the economic backdrop is sound, according to our analysis of asset performance following shocks since 1962. U.S. Treasuries can be an effective hedge during such episodes, we find. This perceived safe haven also tends to rally ahead of “known unknowns” such as elections with binary outcomes, then lag after the event as the lifting of uncertainty boosts risk assets. Market effects of localized geopolitical shocks tend to linger longer where the events occur. A longer-lasting and more acute negative global market reaction is more likely if multiple shocks occur simultaneously or if the economy is weak, we find.
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