Global Investing

CHAPTER 7Geopolitical Risk

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The last major category of risk that we consider is that of geopolitical risk. Geopolitical risks arise from the actions and interactions of countries. Globalization has served to increase the frequency of contact between countries as well as increase competition for scarce goods, raising the possibility of disagreements and conflict. On the other hand, globalization has also led to greater integration and alignment of economic interests, which incentivizes countries to favor diplomacy as a tool of foreign policy. Although greater economic integration between the world's economies is likely to lead to fewer military confrontations, Russia's attack on Ukraine in 2022 reminded us that a peaceful solution to disputes is not always guaranteed.

While most disagreements between countries are resolved peacefully through diplomatic channels, the threat of a disagreement escalating to economic or military conflict must be continuously monitored by global investors. This chapter considers how competing national agendas and resulting geopolitical events can affect equity markets, and how investors can monitor and respond to them effectively. The severity of any given situation is dependent on the importance placed by each party on a particular issue, and the level of urgency for an outcome. Shared interests must also be considered. Issues where the desired outcomes are incompatible and deemed vital to both parties have a greater probability ...