Top Geopolitical Risk in 2022
Geopolitical risk is the risk an investment’s returns could suffer as a result of political changes or instability in a country.
It can come in many forms, including wars, political revolutions, and changes in government policies. These events can create uncertainty and can disrupt international trade, investment, and business operations.
The risk of geopolitical instability plays a significant role in our investment process, since we avoid investing in countries that are considered to be unstable.
Where are the greatest geopolitical risks in the world right now?
The current war between Russia and Ukraine has been devastating in terms of human and economic costs for both sides.
As NATO Secretary General Jens Stoltenberg stated, even if the war were to end quickly with Russia, the relations are beyond repair and trust has been destroyed.
The Tension Between US and China
There is also tension between China and Taiwan. We do not exactly know how far these tests of geopolitical risk will go. Would the United States and its allies defend Taiwan if China tried to invade it?
For example, China’s share of world trade is over seven times larger than Russia’s and constitutes about 19% of all American manufactured goods imports.
Imagine what sanctions on China would be like for the world. It would have terrible consequences; the supply chain would collapse, economic activity would decline significantly, and our current issue of inflation would get worse; as a result, inflation would soar.
President Xi made it clear in the opening speech at the 20th Party Congress. China will have to face a dangerous storm that lies ahead, pursue the goal of becoming a regional and global power by mid-century and continue to shift economic policy determination more to the state and less to the market. Compared to the last decade, that seems to be a complete turn around.
One of the most significant geopolitical risks in recent years has been the trade war between the United States and China. The US and China are currently in a trade war, a technology war, a geopolitical war, and capital/economic war as well. It’s dangerous that a potential Taiwan invasion by China could lead to a military war.
For example, the recently passed US bill that will cut off needed high AI semiconductor chips to China as well as Russia cutting off natural gas supplies to Europe are analogous to the US cutting off oil to Japan in 1941 which led to the Japanese bombing of Pearl Harbor. There are also the classic big increases in military spending that typically come just before wars which we have witnessed recently.
The economic sanctions have been severe and effective in terms of damaging the Russian economy but it has not stopped the Russian invasion so far.
However, will this war extend beyond Ukraine and lead to NATO involvement? This is the greatest risk that we are currently watching carefully as Russia and NATO have almost comparable military capabilities. Both nations have nuclear weapons, so if things go wrong, they could have horrendous consequences.
Warren Buffet once said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow Jones index rose from $66 to $11,497. The Dow Jones index since trades even higher at $33,794 in March 2022.”
Historically, on average, the stock market has recovered from wars and other conflicts in the long run.
The stock market has been falling and it may continue to fall or rise. Although we cannot predict short-run price fluctuations, we know the market historically recovers in the long run.
The world economy is slowing, inflation has been on the rise, and tight monetary policies to counter inflation are drying out liquidity from the financial markets.
Another Major Geopolitical risks
The world’s leading powers are clearly in a critical stage. North Korea’s threats to its neighbour and Iran’s conflicts with Israel and Saudi Arabia continue.
Also, many more countries have conflicts, for example, Turkey in conflict with Greece, India in conflict with Pakistan and China, Yemen in conflict with the UAE, and Saudi Arabia, and Palestine in conflict with Israel.
Overall, geopolitical risk is an important consideration for business operating in an increasing interconnected and globalised world.
The future is inherently unknowable and it’s difficult to predict with absolute certainty what is ahead of us. But, as an investor, it’s better to be flexible and adjust our view whenever we encounter new information and above all to think about the long term as it’s easier to forecast.
Therefore, if you are a long term investor, you should not be afraid to buy, especially if stock prices decline and inflation increases. Both are good arguments to buy stocks because quality companies are able to pass on inflation to consumers.
This blog is written by Awet Ghirmay. He is a Head of Investment Research at Minerva Money Management Limited. The Fund is authorised in the United Kingdom and regulated by the Financial Conduct Authority (FCA) Firm Reference Number:754570.
Risk warnings
*The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
