Geopolitical risks are on the rise – and can have meaningful impacts on the global economy, financial markets and investment portfolios. Such impacts are difficult to quantify or to predict. BlackRock has launched an effort to better measure and monitor geopolitical risks and their market impact in a systematic way. We present our framework – and the early conclusions of this ongoing work.
Shock waves
U.S. equity returns after exogenous geopolitical shocks, 1962–2017
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Thomson Reuters Datastream and Bloomberg, June 2019. Notes: The charts focus on 31 "exogenous" (unexpected) geopolitical shock events between October 1962 and January 2019. Examples include terrorist attacks and the Arab Spring. The chart on the left depicts average equity returns following the shocks. We use the S&P 500 as a proxy, given its longer available history than global equity indexes. The chart on the right shows equity returns following the eight shocks that occurred in months when the U.S. economy was contracting (ISM U.S. Manufacturing PMI was below 50). The "Average return" lines are calculated based on the closing price of the S&P 500 Index one day before the event date. One the left hand chart, the average return (all periods) line shows the cumulative average daily return between 1960 and 2019; on the right hand chart, the average return (contraction periods) line shows the cumulative average daily return between 1986 and 2015 when the U.S. PMI was below 50. The shaded gray "range" is the standard error, or standard deviation, of the historical distribution.
A key takeaway from our study of 68 key geopolitical risk events since 1962: The average market response to unexpected geopolitical shocks has historically been relatively modest and short-lived. Equity markets have shown modest losses in the 30 trading days following an “exogenous” (unexpected) geopolitical event, our study of the 31 geopolitical events showed. See the chart on the left.
The negative market reaction has historically been more severe when the economic environment is weak to begin with, our study showed. The average return for all exogenous geopolitical shocks that occurred when the U.S. economy was contracting tended to be of greater magnitude, as the chart on the right shows. This makes analysis of such risks very pertinent in today’s late-cycle economic environment, we believe.