How to position for geopolitical shocks in 2024: latest analysis from State Street Global Advisors

by | Mar 28, 2024

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State Street Global Advisors have released their latest report today entitled ‘How to position for geopolitical shocks in 2024’. It’s one in which they explore what are the most appropriate and easily implementable portfolio strategies for the year in the face of varied geopolitical risk.

Multiple wars and an unprecedented number of global elections should imply a higher geopolitical risk premium in 2024, says State Street Global Advisors. Most risk assets, however, seem to be pricing in a benign macro environment. We examine the most appropriate and easily implementable portfolio strategies for investors who believe that these calm market conditions inadequately reflect the balance of risks.

What Risks Are We Thinking About?

To identify the right strategies, we need to first specify the prevailing geopolitical risks. We believe they can be grouped into two categories:

 
 

Global Supply Shock Scenario

A material supply shock would be similar to the 2022 experience when the Russia-Ukraine war triggered a stagflationary shock by affecting global energy and food supply. The most likely candidate scenarios are again linked to energy disruption and therefore found in the Middle East. Currently, the most compelling threat would arise from a flare-up in the conflict between Israel and Hezbollah on the Lebanese-Israeli border. A full-blown war could draw in Iran and the United States, with a sizable chance of disruptions to Gulf shipping (leading to reduced maritime oil shipping), or even to actual oil production if Iran or its proxies were to disrupt production in the region.

Regional Crisis Scenarios with Risk-off Spillover

 
 

These cover scenarios where actual supply disruption is avoided, but markets are fearful and quickly reprice downside risks of such a disruption. The consequence would be a large rotation of capital out of risk assets into safe assets. There are multiple plausible scenarios that could set off such a dynamic.

In Asia, it is conceivable that North Korea induces a crisis that exceeds previous stress episodes. Less likely, one could imagine tensions in the Taiwan Straits breaking with precedent, threatening trade or production in semiconductors. Outside of Asia and the Middle East, a confluence of simultaneous crises in less economically central regions (e.g., Venezuela-Guyana and other smaller oil producers) could engender a similar effect.

These odds are higher given the backdrop of the US election, which raises the incentives of global actors to time initiatives in 2024. Here the macroeconomic transmission would matter less – as there would not actually be a material supply disruption. Rather, it would be financial market dynamics that would sharply reprice risk premia upwards across the board, with currencies moving first and to the strongest extent.

 
 

Such big price moves would then set off some knock-on effects that would concentrate in certain markets, both across the globe, or in risk pockets within larger developed markets. The magnitude of any financial ripples could be great, especially given that some risk scenarios could directly affect valuations of the “Magnificent Seven” stocks, due to their reliance on hardware supply chain from regions such as Taiwan (notably NVIDIA, Apple, and Amazon).

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