Geopolitical shocks and shifts

A common view across firms and investors over the past few decades has been that, although geopolitics may be interesting, it does not materially shape profits or returns.  Indeed, the market and commercial impact of geopolitical events like 9/11 or the Trump US/China trade wars was often fairly nominal or short-lived. 

Over long horizons, geopolitical shocks have been argued to be just another source of noise, along with other transitory economic and policy shocks. 

But this perspective is changing, with geopolitics now firmly on the strategic agenda for Boards and CEOs – and a central theme for institutional investors.  US/China strategic rivalry is a core part of the functioning of the global economy, affecting trade, investment, and technology flows; and the economic sanctions imposed after Russia’s invasion of Ukraine has had a clear commercial and market impact.  And from the Middle East to Taiwan, there are multiple commercially-relevant geopolitical risks on the radar.

From Germany to Japan, and ASML to TSMC, the impact of geopolitical events on firms and economies is increasingly evident.  An interesting paper just out finds that the geopolitical exposure of firms has a material, strengthening impact on financial performance. Internationally exposed firms and investors need to treat geopolitical dynamics as a first-order driver of outcomes.

The full note is available at: https://davidskilling.substack.com/p/geopolitical-shifts-and-shocks