BLACKROCK INVESTMENT INSTITUTE

Geopolitical fragmentation and economic competition

Geopolitical fragmentation and economic competition is one of the five mega forces that we track. Globalization is being rewired as the world splits into competing blocs.

 

Explore this interactive page and stay abreast on the top 10 geopolitical risks and their potential impact on markets.

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Q: The BlackRock Investment Institute has identified geopolitical fragmentation as one of the mega forces shaping the economic and market environment. What are your views on fragmentation and the geopolitical landscape more generally?

CATHERINE KRESS: The global economy and geopolitical landscape have been subject to repeated shocks over the last half a decade. Starting with the US led trade wars, extending to the COVID pandemic, Russia’s invasion of Ukraine, and now the outbreak of war in Israel and Gaza, cascading crises have built on each other and now hang over the global economy.

There are an unusually large number of volatile situations in the world today. In fact, the UN declared that the number of violent conflicts worldwide is at its highest level since World War II. Fragmentation is deepening. We’re seeing heightened competition, less cooperation, including among the world’s major powers. We’ve spoken about the emergence of competing blocks; those blocks are hardening. The result is that geopolitics, from an investment perspective, has become a persistent and structural market risk.

Market attention to geopolitics, as measured by our proprietary BlackRock Geopolitical Risk Indicators, has hit its highest level in a year. Heading into 2024, I expect these trends to continue.

Q: What do you see as the economic impact of geopolitical fragmentation?

CATHERINE KRESS: Geopolitics, and national security concerns in particular, will increasingly drive business decision making and economic policy. Economic relationships are rewiring along geopolitical lines. As the world fragments, the economic costs are becoming increasingly clear. What are we seeing? One, reduced trade between geopolitical blocks. Two, a general decline in dependence on cross border suppliers, alongside a specific decline in direct US sourcing from China.

And there, the rise of connector countries. As the US reduces imports from China, it’s increasing imports from places like Vietnam and Mexico. These countries are in turn increasing imports from China. The result is that supply chains are getting longer and more complex. While absolute levels of trade may not be declining, trade patterns are shifting, and this will have costs. The rewiring of globalization is likely to be inflationary, and absent some large-scale tech driven productivity gains, trade fragmentation according to the IMF, could reduce global output by up to 7% of GDP.

Q: Where are there opportunities as countries and companies confront the change in global trade wars?

CATHERINE KRESS: In this environment of globalization rewiring, certain areas stand to benefit. For example, industrial policy will drive a surge of investments in industries of focus. We see this clearly in the US with the Inflation Reduction Act and the CHIPS and Science Act. And geographically, a number of emerging markets stand out, particularly those with valuable commodities and supply chain inputs. That includes India’s chemical and industrial manufacturing, South Korea’s battery and memory supply chain businesses, Indonesia’s nickel and cobal – cobalt – and –

CATHERINE KRESS: That includes India’s chemicals and industrial manufacturing, South Korea’s battery and memory supply chain businesses, Indonesia’s nickel and cobalt, and Chile’s lithium. Some, like Mexico, could benefit from the US and other developed market efforts to bring production closer to home. These are some of the areas of opportunity I see.

CATHERINE KRESS: The global economy and geopolitical landscape have been subject to repeated shocks over the last half decade. Starting with the US led trade wars, extending to the COVID pandemic, Russia’s invasion of Ukraine, and now the outbreak of war in Israel and Gaza, cascading crises have built on each other and now hang over the global economy.

There are an unusually large number of volatile situations in the world today. In fact, the UN declared that the number of violent conflicts worldwide has hit its highest level since World War II. Fragmentation is deepening, and we are seeing heightened competition, less cooperation, including among the world’s major powers. We’ve spoken about the emergence of competing blocks; those blocks are hardening. The result is that geopolitics from an investment perspective has become a persistent and structural market risk.

Market attention to geopolitics, as measured by our proprietary BlackRock Geopolitical Risk Indicators, has hit its highest level in a year. Heading into 2024, I expect these trends to continue.

CATHERINE KRESS: In this environment of globalization rewiring, certain areas stand to benefit. For example, industrial policy will drive a surge of investments into industries of focus. We see this clearly in the US with the Inflation Reduction Act and the CHIPS and Science Act. Geographically, a number of emerging markets stand out, particularly those with valuable commodities and supply chain inputs. That includes, for example, India’s chemical and industrial manufacturing, South Korea’s battery and memory supply chain businesses, Indonesia’s nickel and cobalt, and Chile’s lithium. Some, like Mexico, could benefit from the US and other developed market efforts to bring production closer to home. These are some areas of opportunity I see.

The impact of the geopolitical environment with Catherine Kress

Head of Geopolitical Research & Strategy

Rewiring global supply chains

The Ukraine war and strategic competition between the U.S. and China have ushered in a new era of competing geopolitical and economic blocs. This marks a departure from the post-Cold War era of steadily increasing globalization. We see countries favoring national security and resilience over economic efficiency, accelerating the rewiring of supply chains. As competing blocs firm up, multi-aligned countries are likely to grow in power and influence. A surge of investment in tech, energy, infrastructure and defense could create opportunities.

Multi-aligned countries

Countries like the Gulf oil states, India, Brazil, Vietnam and Mexico have valuable resources and supply chain inputs. We think they will align based on national interests – further rewiring supply chains and industrial policy.

Growth and inflation

Without significant tech-driven productivity gains, a preference for national security and resilience over economic efficiency will likely result in lower growth and higher inflation.

We think economic growth will be more volatile and more vulnerable to shocks.

Investment implications

Industrial and protectionist policies could spur investment in areas like technology, clean energy, infrastructure and defense – potentially creating opportunities. Yet economic costs could rise longer term, particularly in emerging markets.

Investors will need to be more cautious in targeting themes set to benefit from these trends, we think.

Discover our key themes for the 2024 Midyear Global Outlook

Read the latest views from BII across asset classes, as we take stock of recent events and their potential implications for tactical and strategic allocations.
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