In the current times, the world is connected more than ever. Globalization is just not about transporting goods and services from one country to another anymore. The meaning has expanded further to technology transfer, free trade agreements, regional policy tie-ups, defense partnerships etc. This means that an investor cannot just look at his/her resident country’s economic situation and invest in markets or other asset classes.
Amid all this, suddenly if there is a war-like situation between a few countries, the implications on one’s favorite investment region could be big both at the market-level, as well as the specific sectors and stocks in which he/she is invested in. Now, this is called one of the geopolitical risks for the investor.
If the Fed Chairman of the strongest economy, the US, says that he is ready for a rate cut now, the economies are so connected today that a majority of the countries would also start thinking about reducing their interest rates including India.
If one recalls the recent Israel-Hamas war that started in October this year, the global investor community went on a standstill trying to figure out how the global economies will react and where the oil prices are headed to.
In fact, if one goes back a year before in February 2022 when the Russia-Ukraine war started, Brent crude shot up from $85/bbl to above $100/bbl in no time. The war led to a very heavy inflationary situation across the Euro zone with rising commodity prices especially energy and food.
Bad geopolitical situations between a few regions/countries can also be good for some other regions. For example, the rising US-China tensions open up a great opportunity of India to become a global supply-chain hub. The Russian oil that India has been getting at discounted price has been a blessing in disguise for the country’s import bill as well.
All these examples indicate that the weightage of geopolitical risk in an investor’s investment decision-making has certainly gone up significantly. Hence, these situations are crucial for every investor to understand and make informed and timely decisions. It keeps changing from bad to good and vice-versa and one needs to identify that and focus on making long-term sustainable returns.
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