Understanding Geopolitical Risk
Rising conflicts, shifting alliances, and economic protectionism are reshaping global markets. Political tensions and trade disruptions demand that investors consider geopolitical risks. ACLED reports global conflicts have doubled in five years, increasing uncertainty.
Key Trends Impacting Markets
- Erosion of Democracy: The global democracy index hit an all-time low, with over 2.8 billion people in declining democracies.
- Rise of Protectionism: Trade wars, tariffs, and reshoring efforts disrupt global supply chains.
- Nearshoring Growth: U.S. and Canadian incentives are shifting production to Mexico, now the top U.S. trade partner.
- Market Exposure Shifts: Consumer Cyclicals are at higher risk, while Japanese and Australian companies face reduced portfolio weight.
Managing Geopolitical Risk
- Industry & Country Selection: Avoiding vulnerable sectors and regions.
- Company-Level Risk Analysis: Assessing revenue, shareholder structures, and supply chains.
- Geostrategic Risk Rating (GRR): Developed with J.H. Whitney to measure company exposure and enhance resilience.
The NATO Case Study
Applying NATO-based risk assessments, the GRR methodology filters out over 30% of companies from the Solactive GBS Developed Markets Index:
- Technology remains the largest sector despite minor reductions.
- Consumer Cyclicals drop by 40% due to global dependencies.
- Japan & Australia face near elimination, while U.S. weight increases by 10%.
A Resilient Investment Future
Solactive and J.H. Whitney offer tailored indices to mitigate geopolitical risks while maintaining strong performance potential.
