This brief examines how geopolitics influences markets, from conflicts and energy prices to supply chain shifts, renewable energy, and Treasury risks — and what these influences mean for investment returns.
Overview
In the 2020s, geopolitical events that influence financial markets have become both more common and more intense than at any time in the last 50 years. This Research Foundation brief demonstrates how geopolitics can influence investment returns. It uses a case study of an armed conflict and its knock-on effects on energy prices (the Russian invasion of Ukraine) as a starting point to discuss how investors should think about geopolitics and how such developments can influence the fair value of stocks and other investments.
Next, the brief discusses the latest developments in the rivalry between the United States and China and how the tariffs implemented by the United States influence both the US economy and other countries. This rivalry leads not only to rising tariffs but also to increased government intervention in markets in general through the use of industrial policies. It also leads to increasing fragmentation of global supply chains, all of which have long-term consequences for economies and financial markets.
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The brief then dives into the divergence in the adoption of low-carbon energy from renewable sources between the United States and other regions. Although this divergence is driven partly by differences in the economics of wind, solar, and conventional sources of power such as natural gas, the differing approach also has an important geopolitical dimension. Countries in Europe and Asia that are resource poor can significantly reduce their dependency on fossil fuel exporters by expanding domestic production of power from wind and solar.
The last section in this brief discusses the relatively recent development of a rising risk premium on US Treasury securities, historically the safest assets in the world. The brief discusses drivers behind this increasing risk premium, how investors react to it, and its impact on the US dollar and other currencies.