Geopolitical influences on markets

Written by Sanni Heikkinen

Geopolitical influences on markets - War in Ukraine and China’s influence

Geopolitical events and decisions have a significant impact on global markets and the investment climate. Geopolitical factors such as international relations, political tensions, trade wars, military conflicts and environmental issues can create uncertainty and directly affect the economic outlook. In this post, we will examine the impact of geopolitical factors on markets and investing using current examples. It also concludes with a discussion of how investors can prepare for potential risks.

In global markets, geopolitical events and decisions affect the global economy. It is therefore worthwhile for investors to follow developments in global politics.

The term geopolitics refers to the impact of countries and their relations on world politics, taking into account in particular geographical factors. Geopolitics therefore refers to the impact of the geographical location of countries on their political, economic and strategic activities on the international stage. It also focuses on the efforts of states to achieve strategic interests within their own territory as well as internationally. Geopolitics helps to understand why countries react in certain ways in certain situations and how these reactions can affect markets and investors.

GEOPOLITICAL RISKS & MARKET UNCERTAINTY

When you open the news, you can hardly avoid the various geopolitical threats. The first geopolitical risk that may come to mind is that of various armed or diplomatic conflicts, of which there are many examples when we look at the events of recent years. But there are also other important risks, such as environmental and climate crises and currency risks.

One visible manifestation of risk realisation is the fall in share prices as investors seek better risk/return ratios elsewhere. This is because investors may react to increased uncertainty by selling their holdings and switching to investments they perceive as safer. This phenomenon is often associated with fears of large price fluctuations or significant losses.

However, it can be said that even major wars do not have a long-term impact on markets. Investors may therefore see the fall in prices as an opportunity, as markets often recover relatively quickly from geopolitical shocks. However, this does not mean that military conflicts, for example, cannot have serious economic effects in the short term.

In the context of various crises, there is also often talk of safe havens, which are generally considered to be relatively safe and stable places to invest in times of uncertainty. When major crises take hold, investors turn to these safe havens. One traditional example is gold, which is often seen as a store of value and does not carry any political risk. However, it should be noted that no investment is completely risk-free.

war in ukraine

Russia's war of aggression against Ukraine in February 2022 is a current example of a geopolitical threat. The uncertainty created by the state of war has forced many companies operating in the Russian market to react quickly to the new uncertainties. The effects can be seen, for example, in changes in production, both in export and import activities. Many companies that were considered to have significant links with Russia, for example through production or sourcing, found themselves in a difficult situation and withdrew from the Russian market altogether. Consequently, share prices also reacted to this change.

This war has also had an inflationary impact. Russia has been a major importer of oil globally. In the graph below, we see that light fuel oil prices shot up significantly when the war in Ukraine started. The price rose as Russia first reduced gas exports to Europe and eventually cut them off completely to all countries that supported Ukraine. However, Russia's energy would have been cut off completely, including through sanctions. This led to an energy crisis, i.e. energy supplies suddenly became insufficient to meet demand, which eventually led to a price rise. In addition, up to one third of the electricity imported into Finland was originally from Russia, which helps to explain the increased electricity prices in our country.

CHINA'S IMPACT ON THE WORLD ECONOMY

In recent years, world markets have been characterised by an increase in trade wars. Trade wars between the US and China have spilled over to many other economies, creating uncertainty in global markets. Tariffs and trade barriers can have a direct impact on the profitability of companies and global supply chains, affecting investors' expectations and decisions.

The importance of the Chinese economy is also reflected in stock markets. China's activities and economy can cause major fluctuations in stock markets around the world. For example, in 2015, the collapse of the Chinese stock market had a negative impact beyond China's borders.

China is the world's second largest economy and has become a major player in the global market. Its rapid growth has led, among other things, to many countries now being dependent on the Chinese economy. This dependence on China is reflected, among other things, in the outsourcing of production. The words "made in China" are certainly familiar from clothing or electronics, for example.

Long-standing tensions between China and Taiwan pose a general risk to the global economy. Should the situation escalate, the global repercussions could be significant, as Taiwan is responsible for a large share of world semiconductor supplies. This could lead to disruptions in the semiconductor market and possible global semiconductor shortages. This event would have a huge impact on the global economy, as semiconductors are essential for devices ranging from refrigerators to airplanes. A further concern in this situation would be that the imposition of serious sanctions would be complicated by the so-called China dependency, which would add to the complexity of dealing with the situation.

On the other hand, China's economic growth could also create opportunities for investors. Its growing middle class and consumption can provide opportunities for companies active in consumer goods and services.

WHAT SHOULD AN INVESTOR CONSIDER?

When we talk about investing in the midst of geopolitical turmoil, one smart way to protect your savings is to diversify. I'm sure almost everyone more or less familiar with investing has heard the importance of diversification mentioned. In simple terms, this means that investors should not invest too much of their assets in the same industry or geographical area and should diversify their investments over time. By buying shares or different funds in different sectors and geographical areas, the investor avoids excessive individual risks.

It is also worth remembering that stock markets have generally recovered quite effectively after crises, so there is no reason to panic when the unexpected happens.