Four signals to track as geopolitical risk rises（只提供英文版本）

Geopolitical upheavals have become a defining feature of the global landscape, from regional conflicts to terrorist attacks and abrupt leadership crises. The latest Middle East war has again thrust geopolitical risk to the forefront of investors’ minds (see Exhibit 1). But how much do these shocks really matter for markets – and how can investors recognise the moments when geopolitics start to matter for portfolios?

To answer that question, our team examined 49 major geopolitical events since 1950, including wars, armed interventions, civil uprisings, terrorist attacks, leadership crises and global structural shocks.¹ Our goal was to offer something investors urgently need: a framework for recognising when geopolitics truly threaten markets, and when they do not.

More importantly, our research shines a light on the signals to track now as today’s conflict, energy dynamics and financial conditions evolve. Those signals – which determine whether a shock stays temporary or evolves into a deeper market event – are the thread that connects the historical evidence to today’s investment decisions.

Geopolitical shocks tend to trigger abrupt but short lived market reactions. On average over the past 35 years, spikes in the Geopolitical Risk Index led to a brief risk off move, with equities falling, while government bonds – especially US Treasuries – and gold typically rise (see Exhibit 2).

These moves usually fade quickly. Historical evidence shows that equities have tended to recoup losses within two months, the US dollar partly recovers, and bonds and gold hold modest gains. Importantly, cross asset correlations remain broadly stable, meaning that traditional diversification continues to work even during periods of acute geopolitical tension.

In short, while geopolitical news flow can spark bouts of volatility, markets usually look through them unless deeper economic forces take hold.

Although most of the 49 geopolitical episodes left only a faint and temporary mark, some had far more significant consequences. Two factors stand out over the past seven decades as defining the difference between short term turbulence and more persistent market stress:

1. Sharp oil price spikes

Some of the most damaging episodes – such as the Yom Kippur War in 1973 and Iraq’s invasion of Kuwait in 1990 – were accompanied by sharp increases in oil prices, often 50% or more within months. These supply shocks pushed inflation higher, squeezed consumers and businesses, and contributed to economic downturns.

Today, the current Middle East war has again put energy markets at the centre of investor attention. While oil prices have risen meaningfully, history suggests the key question is whether price pressures continue to escalate enough to threaten global growth. This is the pattern that has distinguished short‑lived volatility from more persistent market corrections in past episodes – and it remains a critical signal for investors to monitor now.

2. Real-economy spillovers leading to recession

When geopolitical shocks feed through into wider economic stress – through weaker confidence, tighter financial conditions, or supply chain disruptions to energy or other key commodities – equities tend to underperform for much longer (see Exhibit 3). Historical analysis shows that whether a recession begins within six or 12 months, equity markets have struggled in these environments.

These two factors – energy supply shocks and rising recession risk – proved to be the real tipping points. Without them, most geopolitical events faded from market pricing relatively swiftly.

Understanding these dynamics helps explain why some assets protect portfolios better than others during heightened geopolitical stress. Our research highlights clear distinctions across safe haven assets:

• Gold delivers the most consistent protection. It performed especially well in episodes where rising geopolitical risk coincided with recessions.
• US Treasuries tend to generate modest gains on average, but their strongest performance occurs when the US Federal Reserve cuts rates in response to underlying economic weakness.
• The US dollar often moves sideways during the initial shock but typically appreciates over a three  to six month window during more severe downturns or elevated geopolitical stress.

These dynamics reflect investors’ search first for stability, and then for yield, in times of elevated uncertainty.

Ultimately, these are the four signals that determine whether geopolitics becomes a significant market‑moving force – and they are exactly the indicators investors should be tracking now (see Exhibit 4):

1. Oil and broader energy shocks – historically, large oil price increases have been a necessary (though not sufficient) precursor to US recessions and remain a key risk factor even in a less energy-intensive global economy.
2. Supply chain disruptions – geopolitical tensions increasingly threaten intermediate inputs such as helium, sulphur, fertiliser and aluminium, with potential global knock on effects.
3. Tightening financial conditions – falling asset prices, central bank rate hikes, stronger safe haven currencies and tighter lending standards can all amplify weakness and expose financial stability risks.
4. Worsening macroeconomic sentiment – persistent stress often weighs on business and consumer confidence, eventually feeding through to weaker activity and slower growth or recession.

In severe episodes, several of these channels interact simultaneously, increasing the risk of more durable downturns.

Recent weeks have seen an unusual alignment: equities, bonds and gold have all declined, while the US dollar has strengthened. Historically, this pattern is uncommon, suggesting markets may be pricing in elements of stagflation risk or adjusting to stretched valuations. 

If tensions ease, the historical record suggests that losses could unwind relatively quickly. But if the conflict persists – especially if oil prices stay elevated and supply chain disruptions broaden – the risk of deeper and longer lasting corrections increases. Investors should therefore closely monitor developments across the key transmission channels. 

While diversification has historically been a robust strategy in periods of geopolitical stress, a regime with persistently positive cross asset correlations would require more active and flexible risk management.

¹ We tracked geopolitical risks through the widely followed Geopolitical Risk Index (GPR) developed by Caldara and Iacoviello. The GPR measures the frequency of newspaper articles covering adverse geopolitical events, providing a transparent proxy for both the timing and intensity of geopolitical shocks. For each spike in geopolitical risk, we analysed the performance of key asset classes – US equities, US Treasuries, gold and the US dollar – over time windows that capture both the initial reaction and the subsequent recovery. In a second, more granular step, we conducted a granular review of all 49 events to isolate the factors behind more persistent equity drawdowns.