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BLACKROCK INVESTMENT INSTITUTE

Geopolitical risk dashboard

September 2024 | Geopolitical risk remains structurally elevated, in our view. The world is entering the third geopolitical era after the Cold War and post-Cold War eras and is seeking a new equilibrium. Yet competition is ongoing, with a significant risk of conflict.
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BlackRock Geopolitical Risk Indicator

The global BlackRock Geopolitical Risk Indicator (BGRI) aims to capture overall market attention to geopolitical risks, as the line chart shows. The indicator is a simple average of our top-10 risks.

Risk summary Market movement Calendar Methodology
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Top 10 risks by likelihood

We maintain our three geopolitical themes for the year: deeper fragmentation between competing geopolitical and economic blocs; a more volatile and less predictable world order and an acceleration of supply chains rewiring. 2024 has been the biggest election year in history, with countries representing over half the global population voting. The U.S. election is in focus and will be a major geopolitical event. We are tracking the implications of different scenarios in key areas such as taxes, trade, regulation and foreign policy.

Risk Description Likelihood Our view
U.S. China strategic competition Tensions escalate meaningfully over Taiwan or in the South China Sea. High The U.S. and China are seeking stability. The two sides are maintaining open lines of communication across many dimensions, including in the military area. We could see a final meeting between President Joe Biden and President Xi Jinping this year. Yet a new normal of intense competition churns beneath the surface. Persistent and large-scale exporting of excess industrial capacity by China has become the next driver of friction with the U.S. and others. Technology competition remains front and center. See our Global technology decoupling risk. In the military space, the U.S. is particularly focused on tensions in the South China Sea. Increased frictions between China and the Philippines over the Sabina Shoal and Second Thomas Shoal pose a meaningful risk of miscalculation or accident, and risk bringing in the U.S. as a treaty ally of the Philippines. Conflict over Taiwan remains a risk over the medium- and long-term and would have a significant global economic impact. The U.S. and its allies are focused on China’s support for the Russian war effort, which could lead to additional U.S. sanctions, as well as the increased frequency of joint exercises between China and Russia.
Global technology decoupling Technology decoupling between the U.S. and China significantly accelerates in scale and scope. High The U.S. and China are engaged in a long-term, zero-sum technological competition that is at the center of the U.S.-China relationship. They are pursuing targeted decoupling, focused especially on advanced technologies like AI, semiconductors, and quantum computing, as well as technologies with military applications. We are monitoring expected Biden administration action regarding digitally connected vehicles, bulk data security, AI reporting, updated chip export controls, and the first-ever outbound investment restrictions focused on key technologies, especially semiconductors and AI. We expect the U.S. to continue to leverage technoeconomic measures like tariffs, sanctions and export controls in either a Harris or second Trump administration. China has responded to date by investing in its own capabilities and building out self-reliance. It has tightened export controls on critical minerals and is considering retaliatory economic actions, particularly against Europe. We expect ongoing tension and the development of parallel, competing tech stacks as a result.
Russia-NATO conflict The war in Ukraine becomes protracted, raising the risk of escalation beyond Ukraine. High Russia’s invasion of Ukraine is the largest, most dangerous military conflict in Europe since World War Two. Ukraine went on the offensive in August when it launched a surprise ground assault into Russia’s Kursk region and seized 500 square miles of territory. However, Russia continues its push in the Donbas and Ukraine remains in a vulnerable position. Russia is receiving significant military support from Iran, including drones and ballistic missiles, as well as major financial backing and dual-use items from China. Ongoing policy debates concern whether Western countries will permit and support long-range arms to be used to strike within Russia, and whether this can bring about some effort to resolve the conflict. We see a ceasefire or diplomatic solution as unlikely this year. For now, the war is likely to remain a continued war of attrition and battle between the two sides’ industrial bases – while the risk of escalation and direct conflict between Russia and NATO remains.
Middle East regional war Regional conflict escalates, threatening energy infrastructure and increasing volatility. High Tensions between Israel and Iran’s Resistance Front allies continue to rise, with Israel’s northern border with Lebanon the current flashpoint. Israel and Hezbollah’s near-daily rocket exchanges have displaced people on both sides of the border, and a series of actions in September have significantly escalated the situation. These include an Israeli attack on Hezbollah communications systems, heavy Israeli airstrikes in Lebanon that caused the deadliest day there since the end of the country’s civil war in 1990, and, most recently, the assassination of Hezbollah leader Hassan Nasrallah. Both sides have talked of a “new phase” in the fighting, and the risk of full-blown conflict is significant. Other potential sources of escalation are Iran’s recent steps to accelerate its nuclear capacity and to deepen its collaboration with Russia. In Gaza, a ceasefire agreement for an exchange of hostages continues to be out of reach as the war between Israel and Hamas hits its one-year anniversary – and there is still no agreed plan for post-war governance and security in Gaza. Israeli operations in Gaza are likely to persist into next year.
Major terror attack(s) A terror attack leads to significant loss of life and commercial disruption. High The threat of terrorism against U.S. interests is at an extraordinarily high level. U.S. law enforcement and intelligence agencies have cited violent extremists, lone actors, and the emergence of new terrorist hotspots as major areas to watch. The FBI has warned of terrorists drawing inspiration from events abroad to attack the U.S., and recent reports have flagged increased vulnerability in the West stemming from decreased investment in counterterrorism efforts. Al-Qaida and the Islamic State keep rebuilding their global reach, showing increased motivation and capability to conduct attacks abroad. The Sahel region is of particular concern as military takeovers have threatened the West’s efforts to fight against terrorism. We see heightened risk of terrorism ahead of the U.S. presidential election.
Major cyber attack(s) Cyber attacks cause sustained disruption to critical physical and digital infrastructure. High Market attention to cyber attacks has reached all-time highs this year. Mounting geopolitical competition will likely cause cyber attacks to increase in scope, scale, and sophistication, we think. Intelligence officials continue to uncover state-backed hackers who have been infiltrating and pre-positioning malware in critical national infrastructure – with the intent to cause disruption and destruction in the outbreak of future conflict. A June hack against a cloud storage company could be one of the biggest-ever data breaches and underscores the threat to cloud infrastructure. We see cyber activity increasing in conflict zones and particularly around elections. Iran has become more aggressive in its foreign influence efforts, and in August U.S. intelligence announced that Iran-based hackers targeted the Trump, Biden and Harris campaigns.
Emerging markets political crisis Increased global fragmentation severely stresses EM political systems and institutions. Medium Emerging market (EM) economies have been boosted by central bank rate cuts and resilient developed market (DM) growth. Yet China’s challenged economic activity and the long-term costs of fragmentation present risks to EM. We expect divergence in EM outcomes after a series of important EM elections in 2024 and are watching the U.S. election in November as a key signpost. While countries like India, Mexico, and Vietnam are likely to benefit from supply chain diversification, others with substantial short-term debt obligations like Argentina remain vulnerable despite domestic policy adjustment. We worry about a lack of international cooperation on debt relief and the impact of a record number of global conflicts around the world.
North Korea conflict North Korea pushes ahead with its nuclear buildup and takes provocative actions such as missile launches. Medium In January, Kim Jong Un renounced peaceful reunification with South Korea as a key policy goal. Since May, North Korea has launched thousands of trash-filled balloons into South Korea. These ballons have disrupted flights and become a new source of tension. In the meantime, North Korea’s nuclear program continues unabated. We see increased risk of further provocation or even military action as Kim looks to build leverage ahead of the U.S. elections. North Korea is growing notably closer to Russia, to which it has become a top arms supplier. This was underscored by President Vladimir Putin’s June visit to Pyongyang for the first time in two decades. Russia and North Korea signed a strategic partnership agreement and signaled a deeper, more extensive defense relationship. In response, South Korea and Japan are bolstering their defenses and strengthening ties with each other and the U.S.
Climate policy gridlock Developed economies fail to increase public investment or take action to achieve net-zero emission targets. Medium The world is seeking to deliver on decarbonization commitments and energy security goals as damaging weather and heat-related incidents increase in frequency and magnitude. Clean energy will increasingly become a source of geopolitical competition, we think, benefiting those who can control and access it. In the U.S., the Inflation Reduction Act will help accelerate the development and deployment of low-carbon technologies, in our view. Countries may have to choose between cheap clean tech and more protectionist, security-oriented industrial policy. We think this year’s U.S. election represents a pivotal point for the implementation of clean energy legislation.
European fragmentation Subdued economic growth and persistent inflationary pressures amid fragile energy security lead to a populist resurgence. Low Market attention to European fragmentation is up sharply since last year. Europe remains largely united on key issues: increasing European Union (EU) competitiveness, building up its strategic autonomy, and supporting Ukraine. These themes are evident in Mario Draghi’s recent competitiveness report. Disagreements are largely centered on execution and financing. Several issues could strain European cohesion going forward. These include migration, which last year reached the highest levels since 2016, and Europe’s approach to China. Revision of the EU Stability and Growth Pact fiscal rules following their suspension during COVID could also put some individual national governments into conflict with Brussels. The latest EU parliamentary elections in June saw centrists retain power, with right-wing and anti-establishment parties gaining ground. In Germany, voters in two eastern states delivered a far-right party its best result since WWII. In July, the Labour Party won the UK election in a landslide. Following snap elections in late June, France’s recently appointed minority government will face difficult 2025 budget negotiations this fall – with lingering question marks around government stability and EU budget clashes.

Sources: BlackRock Investment Institute. Views and data as of September 2024. Notes: The “risks” column lists the 10 key geopolitical risks that we track. The “description” column defines each risk. “Attention score” reflects the BlackRock Geopolitical Risk Indicator (BGRI) for each risk. The BGRI measures the degree of the market’s attention to each risk, as reflected in brokerage reports and financial media. See the "how it works" section on p.7 for details. The table is sorted by the “Likelihood” column which represents our fundamental assessment, based on BlackRock’s subject matter experts, of the probability that each risk will be realized – either low, medium or high – in the near term. The “our view” column represents BlackRock’s most recent view on developments related to each risk. This is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or security in particular. Individual portfolio managers for BlackRock may have opinions and/or make investment decisions that may, in certain respects, not be consistent with the information contained herein.

Comparing market movements and attention

We have developed a market movement score for each risk that measures the degree to which asset prices have moved similarly to our risk scenarios, integrating insights from our Risk & Quantitative Analysis (RQA) team and their Market-Driven Scenario (MDS) shocks. We do this by estimating how “similar” the current market environment is to our expectation of what it would look like in the event the particular MDS was realized, also taking into account the magnitude of market moves. The far right of the horizontal axis indicates that the similarity between asset movements and what our MDS assumed is greatest; the middle of the axis means asset prices have shown little relationship to the MDS, and the far left indicates markets have behaved in the opposite way that our MDS anticipated.

Risk map
BlackRock Geopolitical market attention, market movement and likelihood

Selected scenario variables

How to gauge the potential market impact of each of our top-10 risks? We have identified three key “scenario variables” for each – or assets that we believe would be most sensitive to a realization of that risk. The chart below shows the direction of our assumed price impact.

Geopolitical risk Asset Direction of assumed price impact  
U.S.-China strategic competition Taiwanese dollar Downwards arrow  
  Taiwanese equities Downwards arrow
  China high yield Downwards arrow
Global technology decoupling Chinese yuan Downwards arrow  
  U.S. investment grade Downwards arrow
  Asia ex-Japan electrical Downwards arrow
Russia-NATO conflict Russian equities Downwards arrow  
  Russian ruble Downwards arrow
  Brent crude oil Upwards arrow
Gulf tensions Brent crude oil Upwards arrow  
  VIX volatility index Upwards arrow
  U.S. high yield credit Downwards arrow
Major terror attack(s) Germany 10-year government bond Upwards arrow  
  Japanese yen Upwards arrow
  Europe airlines sector Downwards arrow
Major cyber attack(s) U.S. high yield utilities Downwards arrow  
  U.S. dollar Upwards arrow
  U.S. utilities sector Downwards arrow
Emerging markets political crisis Latin America consumer staples sector Upwards arrow  
  Emerging vs. developed equities Downwards arrow
  Brazil debt Downwards arrow
North Korea conflict Japanese yen Upwards arrow  
South Korean won Downwards arrow
South Korean equities Downwards arrow
Climate policy gridlock U.S. building products sector Downwards arrow  
  U.S. construction materials sector Downwards arrow
  U.S. utilities sector Upwards arrow
European fragmentation Italy 10-year government debt Downwards arrow  
  EMEA hotels and leisure Downwards arrow
  Russian rouble Downwards arrow

 

Source: BlackRock Investment Institute, with data from BlackRock’s Aladdin Portfolio Risk Tools application, July 2022. Notes: The table depicts the three assets that we see as key variables for each of our top-10 geopolitical risks – as well as the direction of the assumed shocks for each in the event of the risk materializing. The up arrow indicates a rise in prices (corresponding to a decline in yields for bonds); the down arrow indicates a fall in prices. Our analysis is based on similar historical events and current market conditions such as volatility and cross-asset correlations. See the “implied stress testing framework” section of the 2018 paper Market-Driven Scenarios: An Approach for Plausible Scenario Construction for details. For illustrative purposes only. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular.

We detail the key geopolitical events over the next year in the table below.

2024 Location Event
September    
September 4 Canada Bank of Canada Meeting
September 10-24 UN UN General Assembly 
September 12 Euro Area European Central Bank Meeting
September 18 U.S. Federal Reserve Meeting 
September 19 UK Bank of England Meeting
September 20 Japan Bank of Japan Meeting
September 26 Switzerland Swiss National Bank Meeting
October    
October 6-11 Laos ASEAN Summits and East Asia Summit
October 17 Euro Area  European Central Bank Meeting
October 22-24 Russia BRICS Leaders Summit
October 23 Canada Bank of Canada Meeting
October 25-27 IMF IMF / World Bank Annual Meetings
October 31 Japan Bank of Japan Meeting
November    
November 5  U.S. U.S. elections 
November 7 U.S. Federal Reserve Meeting
November 7 UK Bank of England Meeting
November 11-24 Azerbaijan COP29 Climate Conference 
November 18-19 Brazil G20 Leaders’ Summit 
November TBC India Quad (Australia, India, Japan, U.S.) Leaders' Summit
December    
December 1  South Africa South Africa G20 Presidency begins
December 7-8 Qatar 2024 Doha Forum 
December 11 Canada Bank of Canada Meeting
December 12 Euro Area  European Central Bank Meeting 
December 12 Switzerland Swiss National Bank Meeting
December 18 U.S. Federal Reserve Meeting 
December 19 UK  Bank of England Meeting
December 19 Japan Bank of Japan Meeting

 

Source: BlackRock Investment Institute, July 2024. 

How it works

The quantitative components of our geopolitical risk dashboard incorporate two different measures of risk: the first based on the market attention to risk events, the second on the market movement related to these events.

Market attention

The BlackRock Geopolitical Risk Indicator (BGRI) tracks the relative frequency of brokerage reports (via Refinitiv) and financial news stories (Dow Jones News) associated with specific geopolitical risks. We adjust for whether the sentiment in the text of articles is positive or negative, and then assign a score. This score reflects the level of market attention to each risk versus a 5-year history. We assign a heavier weight to brokerage reports than other media sources since we want to measure the market's attention to any particular risk, not the public’s.

Our updated methodology improves upon traditional “text mining” approaches that search articles for predetermined key words associated with each risk. Instead, we take a big data approach based on machine-learning. Huge advances in computing power now make it possible to use language models based on neural networks. These help us sift through vast data sets to estimate the relevance of every sentence in an article to the geopolitical risks we measure.

How does it work? First we “train” the language model with broad geopolitical content and articles representative of each individual risk we track. The pre-trained language model then focuses on two tasks when trawling though millions of brokerage reports and financial news stories:

  • classifying the relevance of each sentence to the individual geopolitical risk to generate an attention score,
  • classifying the sentiment of each sentence to produce a sentiment score

The attention and sentiment scores are aggregated to produce a composite geopolitical risk score. A zero score represents the average BGRI level over its history. A score of one means the BGRI level is one standard deviation above its historical average, implying above-average market attention to the risk. We weigh recent readings more heavily in calculating the average. The level of the BGRIs changes slowly over time even if market attention remains constant. This is to reflect the concept that a consistently high level of market attention eventually becomes “normal.”

Our language model helps provide more nuanced analysis of the relevance of a given article than traditional methods would allow. Example: Consider an analyst report with boilerplate language at the end listing a variety of different geopolitical risks. A simple keyword-based approach may suggest the article is more relevant than it really is; our new machine learning approach seeks to do a better job at adjusting for the context of the sentences – and determining their true relevance to the risk at hand.

Market movement

In the market movement measure, we use Market-Driven Scenarios (MDS) associated with each geopolitical risk event as a baseline for how market prices would respond to the realization of the risk event.

Our MDS framework forms the basis for our scenarios and estimates of their potential one-month impact on global assets. The first step is a precise definition of our scenarios – and well-defined catalysts (or escalation triggers) for their occurrence. We then use an econometric framework to translate the various scenario outcomes into plausible shocks to a global set of market indexes and risk factors.

The size of the shocks is calibrated by various techniques, including analysis of historical periods that resemble the risk scenario. Recent historical parallels are assigned greater weight. Some of the scenarios we envision do not have precedents – and many have only imperfect ones. This is why we integrate the views of BlackRock’s experts in geopolitical risk, portfolio management, and Risk and Quantitative Analysis into our framework. See the 2018 paper Market Driven Scenarios: An Approach for Plausible Scenario Construction for details. MDS are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving.

We then compile a market movement index for each risk.* This is composed of two parts:

  • Similarity: This measures how “similar” the current market environment is to our expectation of what it would look like in the event the particular MDS was realized. We focus on trailing one-month returns of the relevant MDS assets.
  • Magnitude: this measures the magnitude of the trailing one-month returns of the relevant MDS assets.

These two measures are combined to create an index that works as follows:

  • A value of 1 would means that the market has reacted in an identical way as our MDS indicated. We call this “priced in.”
  • A value of zero would indicate that the pattern of asset prices bears no resemblance at all to what the MDS for a particular risk would indicate.
  • A value of -1 would indicate that assets are moving in the opposite direction to what the MDS would indicate. Markets are effectively betting against the risk.

*This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving.

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