The 2-Minute Thought: Geopolitical Risk Declining?

Believe it or not, attention to geopolitical risk seems to be declining -- in spite of trade tensions, saber-rattling between the U.S. and China, and emerging markets turmoil.

That at least is according to BlackRock and its quantitative tool, the BlackRock Geopolitical Risk Indicator (BGRI).

The BGRI attempts to measure the amount of attention geopolitical risk is getting from financial markets by monitoring analyst reports, a large database of news stories, and the week’s most popular one million tweets. It calculates the frequency of words related to geopolitical risk and then makes adjustments according to whether the sentiment of the source is positive or negative. It also weights various sources differently (analyst reports get weighted more heavily than news or tweets).

Today the top 10 risks that the BGRI identifies are:

1. U.S.-China relations

2. Global trade tensions

3. Gulf tensions

4. European fragmentation

5. Major cyberattack(s)

6. Latin American populism

7. North Korea conflict

8. Russia – NATO tensions

9. South China Sea conflict

10. Major terror attack(s)

When we started the year off in January, the focus on geopolitics was quite high: In fact, the BGRI was higher than at any point since Russia’s invasion of Crimea. But in the months since, the decline in risk has been noticeable. Certainly, de-escalation of tension on the Korean peninsula has helped:

Source: BlackRock

Source: BlackRock

The BGRI looks at both the likelihood of an event and the impact it will have on global equities. Looking at both factors makes it clear that it is global trade tensions that should be getting our attention now. In contrast, while Latin American populism -- especially in Mexico and Brazil -- is likely, it is not expected to have much of a market impact.

Source: BlackRock

Source: BlackRock

Historically, military disputes and relationship flare-ups haven’t usually pressured global equity prices over long periods of time -- though they often have created short-term market dips and spikes in volatility.

But global trade tensions could be different because tariffs and the need to reconfigure supply chains can directly impact margins and corporate earnings.