Feature – Geopolitics
Last year was a perilous time for investors. Yet that tremulous market environment may not be a blip but the norm going for- ward. That is, if a theory around a geopolitical risk supercycle proves to be correct. This suggests a ‘supercycle’ of geopolitical risk is in its early stages and so more market turmoil is on its way, with all the upheaval that it brings. This is a worrying prospect for many investors, although some will welcome the opportunities that volatility can create. Evidence thus far suggests an analysis grounded on a geopolit- ical risk supercycle has much going for it. This is based on sev- eral converging factors that will shape the geopolitical and financial world going forward. It involves a comprehensive list of the emerging China-Russia partnership, NATO expansion, the Saudi-Iran diplomatic deal, US tech tariffs and industrial policy, a wave of global strikes and mass protests and the mega-election year of 2024 in many parts of the globe, creating mass uncertainty. Tina Fordham, a geopolitical risk strategist who coined the ‘geopolitical risk supercycle’ phrase, says of it: “Based on 25 years of assessing the relationship between geopolitics and markets – there are few genuine ‘black swans’ and most risks are hiding in plain sight. If we don’t see them, it’s usually because we’re either not looking or in denial.” Do investors see these risks in plain sight? Indeed, is the geo- political risk supercycle theory valid? “The short answer is yes,” says Richard Tomlinson, chief investment officer at Local Pen- sions Partnership Investments.
From the fall The shift to a geopolitical risk supercycle scenario should be seen in a wider context of changes taking place in the global economy. This wider context, Tomlinson says, dates back to the fall of the Berlin Wall. “Since the late 80s, we had on-going globalisation, global pow- ers focusing on a peaceful world, essentially on the positives: with some of the poorer parts of the world getting better off and world poverty decreasing,” he says. But that is rapidly changing. The geopolitical risk supercycle outlook goes hand-in-hand with the idea of a new Cold War, ac- cording to a concept put forward by historian Niall Ferguson. “The tectonic plates between China and the US have been changing. It is becoming more of a battle of pre-eminence, eco- nomic and military power,” is how Tomlinson frames it. In the wider historical overview, the so-called Washington con- sensus that dominated following the Second World War, with the creation of the IMF and World Trade Organisation to gov- ern the global economy, is no longer so dominant. “China is now saying: ‘We are a superpower. We have a large economy and a large population’ and [the declining Washington consen-
22 | portfolio institutional | June 2023 | Issue 124
GEOPOLITICS: GAMES WITH FRONTIERS
sus] is an evolution of that important development,” Tomlin- son says.
New world order Tom Donilon, chair of the Blackrock Investment Institute, puts it in starker terms. “We have entered a new world order,” he says. “Two major geopolitical and economic blocs – one West- ern-led and one led by China and Russia – are firming up and are increasingly in competition with each other.” The fragmentation that’s ensued, Donilon says, has led to a dra- matic reduction in geopolitical co-operation and the rise of a group of more assertive and important multi-aligned countries. This is reflected in the high ratings revealed in the Blackrock Geopolitical Risk Indicator, which tracks market sensitivities to
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