For qualified investors

Geopolitics

02-Oct-2017
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.

geopolitics-chart

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.

DOWNLOAD GEOPOLITICS REPORT

This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 2017 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This material is intended for information purposes only and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. In the EU issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. This material is for distribution to Professional Clients (as defined by the FCA Rules) and Qualified Investors and should not be relied upon by any other persons. For qualified investors in Switzerland, this material shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N) for use only with institutional investors as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

©2017 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

MKTG1017E-273591-822708