Markets hate uncertainty, and the type deriving from geopolitical unrest has been heightened this year. Jeff Shen discusses why there may be a silver lining on the horizon for investors.
Geopolitical risks seem to be on a constant crescendo. Each day brings a new worry: Lebanon’s prime minister resigns, separatist groups raise their voices in Catalonia, street protests break out in prosperous cities such as Hong Kong and Santiago.
In the developed world, feelings of inequality arising from stagnant wages for the average worker have been feeding a sense of injustice. This, in turn, has driven populist politicians to power in many countries.
Taken together, these geopolitical risks have cast a pall of uncertainty. Markets notoriously hate uncertainty – and performance historically suffers as a result. But history has shown that the point at which very high uncertainty begins to trend down can be a particularly positive moment for asset prices. We are seeing such an inflection now in sentiment around countries’ economic policies and believe this could provide additional support to an already constructive environment for equity markets.
Quantifying geopolitical risk
Ranking and categorizing the significance of a discrete geopolitical risk is no easy task. Measuring its intensity and comparing it to past episodes are equally challenging. Most geopolitical events are their own unique unknowns without exact precedent.
What we can measure, thanks to modern computational techniques using natural language processing, is the intensity of public attention and sentiment around specific events. This type of analysis is reflected in the BlackRock Geopolitical Risk Indicator, which tracks 10 key geopolitical risk scenarios and their potential market impact.