The year ahead is full of challenges for investors – besides the COVID-19 pandemic, important geopolitical risks can move financial markets. Here are some as defined by the Eurasia Group.
Eurasia Group is a political risk consultancy firm founded in 1998 and reporting on the frontier, developed, and developing economies. It recently released its top risks for 2022, starting with COVID-19, the transition to green energy, and to geopolitics. From the last category, here is what the group sees as relevant to consider: the US midterms, tensions between Russia and Ukraine, and a new Iran policy.
For traders and investors, geopolitics plays a pivotal role. They can trigger a risk-off environment, typically characterized by investors fleeing risky positions and finding refuge in alternative investments and safe-haven currencies. As such, selling stocks and buying the Japanese yen or the Swiss franc is the typical response to geopolitical risks materializing.
The 2022 midterms are viewed as one of the most important in US history because of the implications for the 2024 presidential election. The group argues that four challenging years under Biden could turn out to be just what Donald Trump needs to win, should he decide to run again. According to the latest expressed intentions, he will run and has all the support from the Republican party.
A recent survey reveals that most Republicans believe that the 2020 election was stolen from Donald Trump, so the vote on who will control the House and Senate may be decisive for the 2024 race.
Russia and Ukraine
A conflict emerges at Europe’s outskirts. Russia has built a massive army and sent it to the Ukrainian border. On December 1st, Vladimir Putin, the Russian president, said that Russia wants legal and binding security guarantees that NATO would not expand Eastward.
Biden and Putin will talk on the issue in January, and developments may send shivers to financial markets.
A new Iran policy
Iran is another wildcard for this year’s geopolitical risks. The new president chose a different path than its successors, and so Iran is building nuclear capabilities. Iran is also a potentially major player in the oil market – should the talks with the world powers yield any fruits, the impact on the oil prices may also influence the rest of the financial markets.