Tingshu Wang | Reuterss
The BlackRock Investment Institute said in a report Monday that its proprietary geopolitical risk indicator fell to its lowest level in four years, with investors focusing more on inflation and economic recovery than on geopolitics.
This marks a shift in focus from trade tensions between the United States and China or a nuclear attack in North Korea, both of which have rocked markets in recent years.
“The indicator has hovered in negative territory this year … which means investor attention to geopolitical risks is below the average for the past four years,” the report said. “As a result, geopolitical shocks could surprise investors more than usual. “
“We see a high likelihood that the decoupling of the US and Chinese technology sectors will accelerate in scale and scope, despite relatively little attention” to the risks posed by the separation of Chinese and US technology, according to the report.
The two measures are then combined to create an index. A positive reading, close to one, indicates that the market performance matches the model prediction for the reaction to geopolitical risks. A negative reading indicates that the markets are moving in the opposite direction from what the model predicts.
Although BlackRock did not disclose the exact level of the index, the investment institute said on Monday that the indicator turned negative this year for the first time since 2017 – meaning that investors’ attention on geopolitical risks fell below the average for the past four years.
According to BlackRock, the indicator’s three most likely geopolitical risks are:
- Separation of US and Chinese technology industries.
- A major cyberattack.
- Political crisis in emerging markets due to the inability of countries to control the coronavirus pandemic.
Number four is rising US-Chinese tensions over Taiwan, an autonomous island that Beijing considers part of its territory. The institute does not expect a “military confrontation” against Taiwan this year, but said the tensions pose a “significant risk in the medium to long term.”
In a separate report, they set out their expectations for market reactions to other geopolitical risks.
For example, the BlackRock Investment Institute expects the Chinese yuan to weaken if the separation of US and Chinese tech companies accelerates. Analysts predict that the US dollar will strengthen and US utility stocks will decline in the event of a major cyberattack, and Latin American consumer staples stocks will rise in the event of a political crisis in emerging markets.
In the short term, BlackRock said it was justified for markets to focus more on the economic recovery from the coronavirus pandemic and the inflation outlook.
But they warned that “surges in geopolitical risk could have a disproportionate impact when markets least expect it.”