Geopolitical Risk in a Shifting World Order

In fact, the global economic system has been undergoing a profound transformation for over a decade, which is creating conditions now for stronger and more frequent impact to the global economy and markets.

For decades, investors benefited from the tailwinds of U.S.-led globalization: free trade, integrated supply chains, and geopolitical stability. That era is fading. What’s emerging is a world defined by great power competition, economic nationalism, and rising instability.

In response to these developments, the Global Market Strategy team has prepared a new report on geopolitics, how it impacts the markets, and tangible steps investors can take to prepare for this regime change. 

Find it here: Geopolitics

Why geopolitics matters more today

For decades, U.S.-led globalization helped suppress geopolitical risk. When conflicts or tensions did arise, they tended to have targeted or short-lived impacts rather than disrupt the global economy in a major way.

That era is ending. The world is shifting toward one defined by great power competition, economic nationalism, and rising conflict. Quantitatively, the incidence of geopolitical risk is rising. But more important, we believe these are not isolated disruptions. A deeper structural change is underway in how nations pursue power and security. As a result, short-term geopolitical events, or event risks, are more likely to trigger broader economic and market shifts – and even catalyze paradigm changes.

We can use the German 10-year yield to illustrate the difference between an event risk and a paradigm shift.

Russia’s annexation of Crimea proved to be merely a destabilizing event, as it triggered no significant disruptions in energy markets and caused only brief volatility in financial markets. Politically, western responses were confined to modest sanctions and diplomatic condemnation.

Russia’s invasion of Ukraine, on the other hand, triggered a major shift in global trade and risk pricing. As the global economy grappled with the post-pandemic impact of inflation and supply chain insecurity, energy disruptions drove prices even higher. EU yields rose to reflect higher costs and surging supply chain challenges. The West launched full-scale economic warfare against Russia and ramped up military aid to Ukraine, with NATO expanding and boosting defense spending.

Positioning portfolios for regime change

For years now, investors have shrugged off geopolitical risk as a grouping of low-likelihood, regional events that don’t impact portfolios for any meaningful duration. Or, in the event of a very high-impact event, the repercussions are disruptive enough that positioning portfolios that way today would take investors away from their core goals.

We think those days may be behind us. But then the question for investors remains: what tangible steps can you take to create ballast in a portfolio without ignoring core sources of economic and market value?

Thematically, positioning for regime change means preparing for a new world order where rates are likely to stay higher, economic nationalism is becoming more entrenched, and market risk is increasingly driven by politics rather than economics.

The report spells out concrete steps investors can take to manage macro volatility, diversify country exposure, and position portfolios for the type of change we are seeing. Again: geopolitical risk is no longer just “interesting” or “low likelihood” – it’s impacting investors’ risk and opportunity set; portfolio change may be necessary.