Changing geopolitics:
risks on our radar for 2019

BlackRock Investment Institute |19-Feb-2019

Key points:

  • We worry about European political risks in the medium term against a weak growth backdrop.
  • We see trade risks more fully reflected in asset prices than a year ago, but expect twists and turns to cause bouts of anxiety.
  • We believe country-specific risks may ebb in the emerging world – particularly with a busy year of elections coming up.

European political risks are front and centre as EM-specific worries recede.

Europe has us worried

We expect no immediate flare-up in the region’s political risk but believe investors are underappreciating medium-term threats to European unity. This, along with anaemic growth and dependency on trade, has us underweight European risk assets.

We see Italy’s budget deficit stoking a protracted fight with Brussels, and could see further pressure on Italian bonds and other assets sensitive to European political risks against a backdrop of slowing growth across the Eurozone.

Geopolitical sting

Asset returns around sharp changes in geopolitical risks, 2005-2019

Source: BlackRock Investment Institute, with data from Thomson Reuters, November 2018.

The chart shows the 25%–75% percentile range and average three-month returns for selected assets during rolling three-month periods when the BlackRock Geopolitical Risk Indicator (BGRI) rises (blue bars) or falls (green bars) by more than one standard deviation. MSCI USD Index price returns are used for equities, and Thomson Reuters benchmark index total returns are used for bonds.This is not a recommendation to invest in any particular asset class or strategy, nor a promise or estimate of future performance.

Explore the BlackRock geopolitical risk dashboard

The end game is nigh for Brexit. We see odds of a no-deal exit in March as low, but expect a bumpy road ahead. A second referendum is not impossible. Another European question mark: Will the ECB raise rates? We think not.

Elsewhere, we believe country-specific risks may have peaked in much of the emerging world, but will be on election watch in Argentina, India, Indonesia and South Africa.

Jump to our full geopolitical calendar

Uncertainty around trade is likely to persist, though much has been priced in

Trade frictions look more baked into asset prices than a year ago. Equity markets have cheapened, particularly segments sensitive to key risks such as US-China tensions – as shown above.

We could see the two rivals strike a modest deal that extends a fragile 90-day trade truce. But we expect frictions related to China’s industrial policy and competition for global technology leadership to persist in the long run.

The US believed once China secured more wealth, it would embrace Western values. The Chinese thought Trump was a deal-maker and they could adjust at the margins. Both misread.

Tom Donilon
Chairman, BlackRock Investment Institute

There is bipartisan support in the US for taking a tough line on China across the spectrum, from trade to militarization of the South China Sea. We could see trade tensions with the EU flare up, with the threat of US auto tariffs looming.

Source: BlackRock Investment Institute, November 2018.

The ECB meetings are those accompanied by press conferences. The BoJ events shown are followed by the publication of the central bank’s outlook report.

This material 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 financial instrument or product or to adopt any investment strategy.