Global Weekly Commentary: Geopolitical risks on our 2020 radar
Key points
U.S.-Iran tensions
The recent sharp escalation in U.S.-Iran tensions serves as a reminder of the potential for flare-ups in geopolitical risks as we enter 2020.
Growth outlook
We see growth stabilizing and gradually picking up over the next six to 12 months thanks in part to easy financial conditions.
U.S.-China deal
Strategic competition between the U.S. and China, especially in tech, is likely to persist despite a limited "Phase 1" trade deal.
U.S.-Iran tensions have spiked in recent weeks with the U.S. killing of a top Iranian military leader triggering retaliation. This reminds us of still heightened geopolitical risks across many dimensions, even as we see a relatively benign backdrop for risk assets in 2020. The U.S.-China trade conflict – 2019’s dominant geopolitical risk – has paused, yet we expect enduring strategic rivalry between the two countries. We see U.S. Treasuries as a key source of portfolio ballast.
Chart of the week
BlackRock Geopolitical Risk Indicator-Global, 2005-2020
Sources: BlackRock Investment Institute, with data from Refinitiv. Data as of January 3, 2020. Notes: We identify specific words related to geopolitical risk in general and to our top-10 risks. We then use text analysis to calculate the frequency of their appearance in the Refinitiv Broker Report and Dow Jones Global Newswire databases as well as on Twitter. We then adjust for whether the language reflects positive or negative sentiment, and assign a score. A zero score represents the average BGRI level over its history from 2003 up to that point in time. A score of one means the BGRI level is one standard deviation above the average. We weigh recent readings more heavily in calculating the average.
The market’s overall attention to global geopolitical risks sits at elevated levels, as proxied by our BlackRock Geopolitical Risk Indicator (BGRI). See the chart above. Our BGRI measures the attention to top 10 risks in analyst reports, social and financial media. We had raised the likelihood of growing Gulf tensions late last year, and still see ongoing and heightened tensions despite the avoidance of major confrontation between the U.S. and Iran. The market reaction to date to Gulf tensions has been muted, partly reflecting the decreasing heft of the Middle East in determining global oil prices, with the U.S. now a net oil exporter. Yet a sustained escalation that results in repeated attacks on oil facilities or disruptions to shipping in the Persian Gulf – more materially threatening global growth – would likely change this story.
We see a relatively benign backdrop for risk assets in 2020, with easier financial conditions supporting a growth uptick. Read details in our 2020 Global Outlook. A key underpinning assumption is that global trade tensions move sideways this year. Recent developments in this area have been positive for markets: U.S.-China trade tensions appear to be going sideways, and the U.S.-Mexico-Canada Agreement on trade looks set to pass the U.S. Congress soon. Yet any broader surge in geopolitical risks in the Middle East or elsewhere could undermine the sentiment in – and the performance of – risk assets. What other geopolitical risks should we look out for in 2020? Below we detail three broad dimensions.
First: We are seeing fragmentation at a global level across a range of dimensions, including ideology, trade and technology. Technology decoupling between the U.S. and China is underway and will force countries and businesses to navigate this evolving landscape. We expect such tensions to persist even after a limited “Phase 1” trade deal that may temporarily defuse U.S.-China trade tensions. Domestically, political polarization is reaching a high point in many countries. The U.S., for example, faces a contentious presidential election with the potential for starkly divergent policy outcomes. We have downgraded U.S. equities to neutral on a tactical basis amid rising election uncertainty. The second is an increase in global protests, partly fueled by rising income and wealth inequality and facilitated by social media. Many governments are ill-equipped to respond. With limited monetary and fiscal maneuvering room, this could lead to further unrest in any downturn.
The third is cybersecurity. Tensions are elevated between the U.S. and many adversaries such as Iran and North Korea, which have the capability to mount attacks on critical infrastructure and institutions. An uptick of “ransomware” attacks against cities and states with relatively poor defenses may be a sign of things to come. Markets look to be complacent about such risks: the attention to cyber attacks has been on a steady decline since late 2017, our BGRI shows. U.S. Treasuries and their inflation-protected peers have done well to cushion portfolios against recent risk selloffs – and we prefer them in both tactical and strategic portfolios. Government bonds in Europe and Japan have diminished ability to serve such as role as their yields near lower bounds.
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