For qualified investors


By BlackRock Investment Institute

If markets are a sea of calm, geopolitics are anything but. We outline the 10 geopolitical risks that we are currently tracking.

If markets are a sea of calm, geopolitics are anything but. We have our eyes on 10 geopolitical risks and are tracking their likelihood and potential market impact. See the A world of risk map. We focus on two here: the North Korea crisis and the related risk of deteriorating US-China relations.


We view North Korea’s missile and nuclear weapons program as a major threat to regional stability, US security and nuclear non-proliferation. The possibility of armed conflict has risen, we believe, given North Korea’s missile launches over Japan, a nuclear test and an intense war of words. This has raised the chance of misstep or miscalculation, and we could see limited action such as the shooting down of missiles. Yet we currently see a low probability of all-out war; the costs are too high on all sides. Instead, we expect the US to intensify its ‘peaceful pressure’ campaign, imposing unilateral sanctions and leaning hard on China to participate. We see the crisis straining US-China relations just as economic tensions are rising.

US-China relations

We see frictions between the US and China heating up over time. The countries risk falling into the ‘Thucydides Trap,’ a term coined by Harvard scholar Graham Allison to describe clashes between rising powers and established ones. We see trade and market access disputes straining an increasingly competitive US-China relationship in the long run, and believe markets have yet to factor in this gradual deterioration.

“The US and China are drifting toward greater tensions because of increased economic competition and the inevitable friction of a rising power challenging an established one.”

Tom Donilon — Chairman, BlackRock Investment Institute


In the short term, tensions could rise if Chinese President Xi Jinping pursues an even more nationalistic agenda in the wake of the Communist Party’s National People’s Congress (NPC). Economic tit for tats could lead to an erosion of relations – and have sector-specific effects. US military action against North Korea and/or an accidental clash in the South China Sea would deal a blow to the relationship, in our view, and hurt risk assets. But our base case is that the US and China avoid these land mines in the short term, and try to use US President Donald Trump’s November visit to emphasise cooperation.

We believe long-term government bonds are useful diversifiers against volatility and equity market sell-offs sparked by geopolitical risks.


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