Wei Li, Global Chief Investment Strategist together with Teddy Bunzel, Director of External Affairs, Elga Bartsch, Head of Macro Research and Catherine Kress, Advisor to the Chairman, all part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Market attention to geopolitical risks has fallen to four-year lows. We believe this is justified, as investors appear more focused on the economic restart and inflation outlook and less concerned about geopolitics since the change in U.S. administration. Yet it’s worth watching specific risks as flareups can catch investors off guard when attention is low.
Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, May 2021. Notes: The BlackRock Geopolitical Risk Indicator (BGRI) tracks the relative frequency of brokerage reports (via Refinitiv) and financial news stories (Dow Jones News) associated with specific geopolitical risks. We adjust for whether the sentiment in the text of articles is positive or negative, and then assign a score. This score reflects the level of market attention to each risk versus a 5-year history. We use a shorter historical window for our COVID risk due to its limited age. We assign a heavier weight to brokerage reports than other media sources since we want to measure the market’s attention to any particular risk, not the public’s.
Our dashboard gauges market attention to overall geopolitics and to each of our top-10 risks by tracking the relative frequency of brokerage reports and financial news stories associated with the risks through BlackRock Geopolitical Risk Indicators (BGRIs). The global BGRI score has been trending down in the past year because of fading attention to risks such as U.S.-China strategic competition, Covid-19 resurgence and Gulf tensions. It has hovered in negative territory this year, as the chart shows, meaning market attention to geopolitical risks is below the average of recent years. Overall, this indicates a significant reduction in concern about geopolitical risk since the change in U.S. administration. Our dashboard also provides BlackRock’s fundamental assessment of the likelihood of each risk materializing in the near term. We also introduce a new quantitative measure that seeks to gauge how similar the current market environment is to our estimate of market movement in the event the risk materialized.
We introduce four new risks in the dashboard: Covid-19 resurgence, Emerging market political crisis, Global technology decoupling and Climate policy gridlock. Market attention to Covid-19 resurgence appears low, but we assign medium likelihood to this risk; attention to Emerging market political crisis is relatively elevated, yet we see a low likelihood. We see a high likelihood that decoupling of the U.S. and Chinese tech sectors accelerates in scale and scope, despite the relatively low attention to the Global technology decoupling risk. The pace of global reshoring of technological supply chains has sped up, potentially increasing production costs. This supports our view that markets are underpricing medium-term inflation risks. The Biden administration is continuing its predecessor’s posture of intense rivalry with China, with a focus on critical technologies, and China has made tech self-reliance a top priority. We believe it’s key to invest in both these poles of global growth, as detailed in The role of Chinese assets. U.S.-China tensions over Taiwan have been rising. We do not see near-term risks of military showdown but believe there is a significant medium- and long-term threat.
Climate policy gridlock refers to the risk that developed economies fail to increase public investment and regulatory action to achieve their goals to reduce carbon emissions. Attention to this risk appears low, as reflected in our BGRI, in line with our assessment of a low likelihood. We believe avoiding climate-related damages will help drive growth and improve risk asset returns, and have included the effects of climate change – and a climate transition – in our long-term return assumptions.
In some cases our dashboard reveals a disconnect between market attention and our fundamental analysis. Two examples: First, attention to Major cyberattack(s) risk has receded from a 2020 peak yet we see a high likelihood of this risk occurring. The recent hacking of a U.S. oil pipeline – and its impact on energy markets – highlights the risk. Second, market attention to a potential North Korea conflict is well below the historical average, but we rate the likelihood of the risk as “medium” – and see tensions as likely to increase heading into 2022. North Korean provocations, including long-range missile tests and potential for a nuclear test, could trigger a possible escalation.
The bottom line: We see a relative decrease in market attention to geopolitical risks as justified, particularly in light of powerful key near-term market drivers such as the economic restart and inflation outlook. We remain pro-risk, but note that geopolitical risk flareups could have an outsize impact when markets least expect it.
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of May 20, 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI Europe Index, MSCI USA Index, MSCI Emerging Markets Index, Bank of America Merrill Lynch Global High Yield Index, ICE U.S. Dollar Index (DXY), spot gold, J.P. Morgan EMBI index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index and Refinitiv Datastream U.S. 10-year benchmark government bond index.
Market inflation expectations eased last week, driven partly by a sharp drop in crude oil and broad commodity prices – after the U.S. consumer price index (CPI) surged by more than expected in April. Economic data have been erratic, and we expect more of the same as economies restart amid pent-up consumer demand and supply shortages. We advocate looking through near-term market volatility and remain pro-risk, predicated on our belief that the Federal Reserve faces a very high bar to divert from its new policy framework to keep yields low.
- May 25 – Germany ifo business climate survey; U.S. consumer confidence
- May 27 – Japan consumer price index, jobs report
- May 28 – U.S. personal income and outlays, including PCE inflation
U.S. consumer data and PCE inflation will be in focus this week. PCE inflation, the Fed’s preferred inflation gauge, is expected to increase 2.8% in April – above the Fed’s 2% inflation target. Personal consumption expenditures will provide clues on household spending and saving decisions after the last round of stimulus checks.
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