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BLACKROCK INVESTMENT INSTITUTE

Geopolitical risk dashboard

December 2024 | Geopolitical risk has increased over the past half-decade in the wake of a series of shocks and is now structurally elevated. Economies and markets have so far proven to be adaptable and resilient. We think 2025 is likely to test that resilience.
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BlackRock Geopolitical Risk Indicator

The global BlackRock Geopolitical Risk Indicator (BGRI) aims to capture overall market attention to geopolitical risks, as the line chart shows. The indicator is a simple average of our top-10 risks.

Risk summary Market movement Calendar Methodology
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Top 10 risks by likelihood

Donald Trump's victory in the U.S. presidential election caps a historic year of elections. Across major economies in particular, incumbent leaders were pushed from power or lost their majorities. This trend is likely to extend into 2025. We see the potential for such “change” elections to become more frequent in a world of slower growth and more regular shocks – exacerbating geopolitical volatility.

Risk Description Likelihood Our view
U.S.-China strategic competition Tensions escalate meaningfully over Taiwan or in the South China Sea. High U.S.-China tensions are poised to escalate, in our view. The announced members of the incoming U.S. national security team are committed to economic and technological decoupling, strong support of Taiwan and political and ideological competition – though Trump’s decisions may diverge from his advisors’ views. In the military area, frictions between China and the Philippines in the South China Sea pose a meaningful risk of miscalculation or accident, and risk bringing in the U.S. as a treaty ally of the Philippines. Conflict over Taiwan remains a risk over the medium and long term. Tensions increased in the aftermath of President Lai Ching-te’s recent virtual meetings with U.S. congressional leaders and transit visits to Hawaii and American Samoa. China sent a record number of navy and coast guard vessels to conduct military drills near the island, prompting Taiwan to raise its defense alert level. The nuclear area could be the next risk frontier, as China aims to match the U.S. and Russia in terms of operational nuclear weapons by the end of the decade.
Global technology decoupling Technology decoupling between the U.S. and China significantly accelerates in scale and scope High The U.S. and China are engaged in a long-term, zero-sum technological competition. The U.S. has been pursuing targeted derisking, focused especially on advanced technologies like AI, semiconductors and quantum computing, which it sees as having military applications. This could expand to more full-scale decoupling. The Trump administration is likely to expand on export controls and investment restrictions to limit China's access to advanced technologies and maintain U.S. tech dominance. We see little prospect for U.S.-China cooperation on AI. As a result, we expect the ongoing development of parallel, competing tech stacks. China will likely retaliate against U.S. measures, including through export controls on critical minerals and dual-use technology.
Russia-NATO conflict The war in Ukraine becomes protracted, raising the risk of escalation beyond Ukraine. High Russia’s invasion of Ukraine is the largest, most dangerous military conflict in Europe since World War Two. The conflict has seen intensified fighting in recent months. President Joe Biden has moved to permit Ukraine to fire U.S.-provided long-range weapons into Russian territory and intends to provide the Ukrainians with as much support as possible by the end of his term in order to maximize Ukraine’s position ahead of potential negotiations and U.S. policy changes in 2025. Russia has made territorial gains and continues to receive military and economic support from Iran, China and North Korea. The Russian economy is under increasing pressure. President-elect Donald Trump has promised to broker a quick resolution to the war. In the meantime, Russia has stepped up its use of grey zone tactics and continues to conduct acts of sabotage and espionage across Europe.
Middle East regional war Regional conflict escalates, threatening energy infrastructure and increasing volatility. High The war in the Middle East reflects an entirely new dynamic. Through a series of aggressive military actions, Israel has demonstrated its ability to strike at the leadership of its two most prominent adversaries, Hamas and Hezbollah, and degrade their capabilities more broadly. In Gaza, Israel has achieved most of its war aims but has yet to lay out a long-term plan for the future of post-war governance and security. In Lebanon, a U.S.-brokered peace agreement notches a win for Israel – if it can hold. In Syria, the fall of the Assad regime is one of the most significant events in the Middle East in decades. The regime’s sudden collapse reflects Israel’s campaign against Iran-backed actors, the deterioration of the Syrian military and diminished support by a distracted and overstretched Russia and Iran. The result is a significant blow to Iran’s regional position and to Russia’s role in the Middle East. A second Trump administration will likely provide strong support to Israel and take a hawkish stance against Iran.
Major cyber attack(s) Cyber attacks cause sustained disruption to critical physical and digital infrastructure. High Market attention to cyber attacks has reached all-time highs this year. Mounting geopolitical competition is causing cyber attacks to increase in scope, scale and sophistication. State-backed hacking and espionage operations have targeted major U.S. presidential candidates and their campaigns and revealed vulnerabilities in U.S. telecommunications infrastructure, potentially exposing millions of Americans to ongoing surveillance. This represents an ongoing challenge for the U.S., as officials have been unable to expel the hackers from telecom and internet service infrastructure. Earlier in the year, U.S. intelligence unveiled a state-backed hacking campaign to infiltrate and pre-position malware in critical U.S. national infrastructure – with the intent to cause disruption and destruction in the outbreak of future conflict. We are focused on the threat to cloud infrastructure and also see cyber activity increasing in conflict zones.
Major terror attack(s) A terror attack leads to significant loss of life and commercial disruption. High The threat of terrorism against U.S. interests is at an extraordinarily high level. U.S. law enforcement and intelligence agencies have cited violent extremists, lone actors and the emergence of new terrorist hotspots as major areas to watch. The FBI has warned of terrorists drawing inspiration from events abroad to attack the U.S., and recent reports have flagged increased vulnerability in the West stemming from decreased investment in counterterrorism efforts. Al-Qaida and the Islamic State continue to rebuild their global reach, showing increased motivation and capability to conduct attacks abroad. Instability in Syria could exacerbate the terror risk.
Global trade protectionism Tariffs increase dramatically on goods entering the U.S., negatively impacting the macro outlook. Medium Global trade protectionism has increased coming out of the COVID crisis and is poised to mount further. The Trump administration will use trade policy – particularly tariffs – to address a range of issues, including reducing trade deficits, encouraging inbound investment in the U.S. and sanctioning the non-use of the dollar. Trump’s first-term trade initiatives expanded gradually and focused on industrial inputs like steel and aluminum, as well as products from China. The Biden administration kept many of Trump’s tariffs in place and extended them in some areas. Meanwhile, countries around the world have taken a historically high number of trade-related steps to protect their national interests. We introduce a new Global trade protectionism risk to capture these changes in the global environment, and the rewiring of economic relationships along geopolitical lines. Trump has promised a series of trade measures including a 10% to 20% universal tariff, a 60% tariff on China and tariffs on other countries like Mexico and Canada. If maximally implemented, such tariffs could reinforce geopolitical fragmentation and add to inflation.
Emerging markets political crisis Increased global fragmentation severely stresses EM political systems and institutions. Medium Emerging market (EM) economies have been boosted by central bank rate cuts and resilient developed market growth. Yet China’s challenged economic activity and the long-term costs of fragmentation present risks to EM. We expect divergence in EM outcomes after a series of important EM elections and the U.S. election in 2024. A second Trump administration will seek to raise tariffs to bring manufacturing back to the U.S. and achieve other policy goals – though leave the door open to negotiated deals. We think multi-aligned and “connector” countries will benefit from global supply chain diversification, even with more uncertain U.S. policy. Other countries with substantial short-term debt obligations like Argentina remain vulnerable despite domestic policy adjustment. We worry about a lack of international cooperation on debt relief and the impact of a record number of global conflicts.
North Korea conflict North Korea pushes ahead with its nuclear buildup and takes provocative actions such as missile launches. Medium North Korea has taken a series of escalatory actions this year that risk greater tension in and beyond the Asia Pacific region. In January, Kim Jong Un renounced peaceful reunification with South Korea as a key policy goal. More recently, North Korea has sent munitions and troops to directly support Russia in its war against Ukraine. This delivers on a strategic partnership agreement struck between Russia and North Korea in 2024 – which could see Russia share missile and submarine technology with North Korea in return. Meanwhile, North Korea’s nuclear program continues unabated. We see increased risk of further provocations or even military action as Kim looks to build leverage ahead of Trump’s return to office in January. Trump may seek to moderate North Korea through personal diplomacy, as in his first term, but North Korea is likely to remain a volatile and dangerous actor.
European fragmentation Subdued economic growth and persistent inflationary pressures amid fragile energy security lead to a populist resurgence. Low Europe remains largely united on key issues: increasing European Union (EU) competitiveness, building up its strategic autonomy and supporting Ukraine. These themes are evident in Mario Draghi’s 2024 competitiveness report. Disagreements are largely centered on execution and financing. Tensions between Europe and the U.S. are likely to increase across several dimensions, including trade, U.S.-China competition, Ukraine and European security generally. High levels of migration will also remain a challenge for Europe. Elections in 2024 were punishing for many incumbents. Examples include the UK, where Labour won in a landslide, and May’s European elections, which saw French and German government parties underperform. The results prompted snap elections in France and contributed to the early breakup of the German governing coalition. France now faces a fragmented government, complicating fiscal reforms – and recently held the first vote to oust a prime minister in more than half a century. We are watching for the outcome of German elections in February following the collapse of Chancellor Olaf Scholz’s coalition.

Sources: BlackRock Investment Institute. Views and data as of December 2024. Notes: The “risks” column lists the 10 key geopolitical risks that we track. The “description” column defines each risk. “Attention score” reflects the BlackRock Geopolitical Risk Indicator (BGRI) for each risk. The BGRI measures the degree of the market’s attention to each risk, as reflected in brokerage reports and financial media. See the "how it works" section on p.7 for details. The table is sorted by the “Likelihood” column which represents our fundamental assessment, based on BlackRock’s subject matter experts, of the probability that each risk will be realized – either low, medium or high – in the near term. The “our view” column represents BlackRock’s most recent view on developments related to each risk. This is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or security in particular. Individual portfolio managers for BlackRock may have opinions and/or make investment decisions that may, in certain respects, not be consistent with the information contained herein.

Comparing market movements and attention

We have developed a market movement score for each risk that measures the degree to which asset prices have moved similarly to our risk scenarios, integrating insights from our Risk & Quantitative Analysis (RQA) team and their Market-Driven Scenario (MDS) shocks. We do this by estimating how “similar” the current market environment is to our expectation of what it would look like in the event the particular MDS was realized, also taking into account the magnitude of market moves. The far right of the horizontal axis indicates that the similarity between asset movements and what our MDS assumed is greatest; the middle of the axis means asset prices have shown little relationship to the MDS, and the far left indicates markets have behaved in the opposite way that our MDS anticipated.

Risk map
BlackRock Geopolitical market attention, market movement and likelihood

Selected scenario variables

How to gauge the potential market impact of each of our top-10 risks? We have identified three key “scenario variables” for each – or assets that we believe would be most sensitive to a realization of that risk. The chart below shows the direction of our assumed price impact.

Risk Asset Direction of assumed price impact  
U.S.-China strategic competition Taiwanese dollar Downwards arrow  
  Taiwanese equities Downwards arrow
  China high yield Downwards arrow
Global technology decoupling Chinese yuan Downwards arrow  
  U.S. investment grade Downwards arrow
  Asia ex-Japan electrical equipment Downwards arrow
Russia-NATO conflict Russian equities Downwards arrow  
  Russian ruble Downwards arrow
  Brent crude oil Upwards arrow
Middle East regional war Brent crude oil Upwards arrow  
  VIX Upwards arrow
  U.S. high yield credit Downwards arrow
Major cyber attack(s) U.S. high yield utilities Downwards arrow  
  U.S. dollar Upwards arrow
  U.S. utilities sector Downwards arrow
Major terror attack(s) Germany 10-year government bond Upwards arrow  
  Japanese yen Upwards arrow
  Europe airlines sector Downwards arrow
Global trade protectionism U.S. specialty retail & distribution Downwards arrow  
  U.S. consumer durables & apparel Downwards arrow
  U.S. two-year Treasury Downwards arrow
Emerging markets political crisis Latin America consumer staples sector Upwards arrow  
Emerging vs. developed equities Downwards arrow
Brazil debt Downwards arrow
North Korea conflict Japanese yen Upwards arrow  
  Korean won Downwards arrow
  Korean equities Downwards arrow
European fragmentation EMEA hotels & leisure Downwards arrow  
  Italy 10-year government bond Downwards arrow
  Russian ruble Downwards arrow

 

Source: BlackRock Investment Institute, with data from BlackRock’s Aladdin Portfolio Risk Tools application, December 2024. Notes: The table depicts the three assets that we see as key variables for each of our top-10 geopolitical risks – as well as the direction of the assumed shocks for each in the event of the risk materializing. The up arrow indicates a rise in prices (corresponding to a decline in yields for bonds); the down arrow indicates a fall in prices. Our analysis is based on similar historical events and current market conditions such as volatility and cross-asset correlations. See the “implied stress testing framework” section of the 2018 paper Market-Driven Scenarios: An Approach for Plausible Scenario Construction for details. For illustrative purposes only. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular.

We detail the key geopolitical events over the next year in the table below.

Date Location Event
January    
January 11 G7 Canadian G7 Presidency begins
January 3 U.S. 119th U.S. Congress begins
January 20 U.S. U.S. Presidential Inauguration
January 20-24 Switzerland World Economic Forum Annual Meeting
January 29 U.S. Federal Reserve Meeting
February    
February 3-5 Ethiopia African Union Summit
February 10-11 France AI Action Summit
February 14 Germany Munich Security Conference
February 13 Euro area European Central Bank Meeting
February 14 Japan Bank of Japan Meeting
February 20-21 South Africa G20 Foreign Ministers Meeting
February 23 Germany German federal election
February 26-27 South Africa G20 Finance Ministers and Central Bank Governors Meeting
February 27 U.S. Federal Reserve Meeting
March    
March 6  UK Bank of England Meeting
March 12 Canada Bank of Canada Meeting
March 18 Switzerland Swiss National Bank Meeting
March 20-21 EU European Council Meeting
March 26-28 China National People's Congress Annual Session
TBC Malaysia ASEAN Summit
April    
April 23-24  U.S. G20 Finance Ministers and Central Bank Governors Meeting
April 24 Japan Bank of Japan Meeting
April 25-27 U.S. IMF/World Bank Spring Meetings
May    
May 8  Euro area European Central Bank Meeting
May 12 Philippines Philippines congressional elections
May 15 U.S. Federal Reserve Meeting
May 16-18 Italy G7 Summit
June    
June 1  Mexico Mexican election of the judiciary
June 5 UK Bank of England Meeting
June 9-11 Belgium NATO Defense Miniters Meeting
June 12 Euro area  European Central Bank Meeting 
June 18 U.S. Federal Reserve Meeting
June 24-25 NATO NATO Summit
TBC Canada G7 Leaders' Summit

 

Source: BlackRock Investment Institute, December 2024.

How it works

The quantitative components of our geopolitical risk dashboard incorporate two different measures of risk: the first based on the market attention to risk events, the second on the market movement related to these events.

Market attention

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 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 updated methodology improves upon traditional “text mining” approaches that search articles for predetermined key words associated with each risk. Instead, we take a big data approach based on machine-learning. Huge advances in computing power now make it possible to use language models based on neural networks. These help us sift through vast data sets to estimate the relevance of every sentence in an article to the geopolitical risks we measure.

How does it work? First we “train” the language model with broad geopolitical content and articles representative of each individual risk we track. The pre-trained language model then focuses on two tasks when trawling though millions of brokerage reports and financial news stories:

  • classifying the relevance of each sentence to the individual geopolitical risk to generate an attention score,
  • classifying the sentiment of each sentence to produce a sentiment score

The attention and sentiment scores are aggregated to produce a composite geopolitical risk score. A zero score represents the average BGRI level over its history. A score of one means the BGRI level is one standard deviation above its historical average, implying above-average market attention to the risk. We weigh recent readings more heavily in calculating the average. The level of the BGRIs changes slowly over time even if market attention remains constant. This is to reflect the concept that a consistently high level of market attention eventually becomes “normal.”

Our language model helps provide more nuanced analysis of the relevance of a given article than traditional methods would allow. Example: Consider an analyst report with boilerplate language at the end listing a variety of different geopolitical risks. A simple keyword-based approach may suggest the article is more relevant than it really is; our new machine learning approach seeks to do a better job at adjusting for the context of the sentences – and determining their true relevance to the risk at hand.

Market movement

In the market movement measure, we use Market-Driven Scenarios (MDS) associated with each geopolitical risk event as a baseline for how market prices would respond to the realization of the risk event.

Our MDS framework forms the basis for our scenarios and estimates of their potential one-month impact on global assets. The first step is a precise definition of our scenarios – and well-defined catalysts (or escalation triggers) for their occurrence. We then use an econometric framework to translate the various scenario outcomes into plausible shocks to a global set of market indexes and risk factors.

The size of the shocks is calibrated by various techniques, including analysis of historical periods that resemble the risk scenario. Recent historical parallels are assigned greater weight. Some of the scenarios we envision do not have precedents – and many have only imperfect ones. This is why we integrate the views of BlackRock’s experts in geopolitical risk, portfolio management, and Risk and Quantitative Analysis into our framework. See the 2018 paper Market Driven Scenarios: An Approach for Plausible Scenario Construction for details. MDS are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving.

We then compile a market movement index for each risk.* This is composed of two parts:

  • Similarity: This measures how “similar” the current market environment is to our expectation of what it would look like in the event the particular MDS was realized. We focus on trailing one-month returns of the relevant MDS assets.
  • Magnitude: this measures the magnitude of the trailing one-month returns of the relevant MDS assets.

These two measures are combined to create an index that works as follows:

  • A value of 1 would means that the market has reacted in an identical way as our MDS indicated. We call this “priced in.”
  • A value of zero would indicate that the pattern of asset prices bears no resemblance at all to what the MDS for a particular risk would indicate.
  • A value of -1 would indicate that assets are moving in the opposite direction to what the MDS would indicate. Markets are effectively betting against the risk.

*This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving.

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