essay on business risk due to geopolitical tensions

How global companies can manage geopolitical risk

Companies are walking a geopolitical tightrope. As political frictions inside and among regions heat up, the likelihood increases that they will affect a global enterprise’s operations, performance, or people.

The challenges that geopolitical risks create  will get worse. In the next two decades, competition for global influence is likely to reach its highest level since the Cold War. That’s one finding from the US National Intelligence Council’s report Global Trends 2040: A more contested world . 1 Global Trends 2040: A more contested world , US National Intelligence Council, March 2021, dni.gov. According to the report, no single locale is likely to dominate all regions or domains, and “a broader range of actors will compete to advance their ideologies, goals, and interests.”

Nowhere is the fallout from current geopolitical tensions more apparent than the unfolding competition between China and the United States. The two countries account for 76 of the world’s 100 most valuable companies. 2 “The new geopolitics of global business,” Economist , June 5, 2021, economist.com. Channeling the policy debates under way in the European Union, 3 Marcin Grajewski, “The EU strategic autonomy debate: What think tanks are thinking,” European Parliament Think Tank, March 30, 2021, europarl.europa.eu. many global companies are seeking their own form of “strategic autonomy” to navigate China–US relations. Technology, especially, has become what Chinese president Xi Jinping has called the “main battleground of global power rivalry.” 4 Coco Feng, “Chinese president Xi Jinping seeks to rally country’s scientists for ‘unprecedented’ contest,” South China Morning Post , May 29, 2021, scmp.com. Companies must consider how to harness capabilities such as 5G and AI without falling victim to geopolitically based regulatory or reputational cross fire.

Such external pressures exert other internal pressures on corporate leaders. Depending on the circumstance, a company’s leaders may have to weigh the effect that political or media scrutiny on the company’s operations in one area has on its holdings in other locales. They may have to balance, given the risks, near- and long-term market priorities. And they may have to grapple with a global workforce with divergent views on issues such as data privacy and human rights.

Any discussion of such potentially existential issues must start at the top. After consulting with top business leaders and legal, public-policy, and risk professionals at Fortune 500 companies in multiple industries, we suggest that company leaders can use a five-pronged approach to managing geopolitical risk .

1. Start with the board

Many company boards already deliberate geopolitical risks to one degree or another. But the discussions often focus on a specific investment, project, or market entry or exit. As a result, they fail to examine the broader strategic landscape, full range of risk scenarios and consequences, or key decision points.

Instead, boards can dedicate regular standing time to analyzing how to respond to the geopolitical risks that their enterprises face as part of a broader board effort to build more resilient companies . Not engaging in such discussions in the current geopolitical context would be malpractice.

One way to initiate a more strategic approach is by assessing the risks that matter the most to a business. The business’s board can apply a materiality test to pinpoint what it should dedicate time to discussing. For example, the Iran nuclear talks have significant regional and global consequences. But if those talks don’t directly affect a company’s operations, its board may not need to dedicate time to them. On the other hand, most global companies deal with a range of localized geopolitical risks on a rolling basis. Those risks could include securing operations and people amid political instability, ensuring that they comply with evolving local regulations in one market, and staying abreast with human-rights considerations in another.

For many companies, the strategic competition between China and the United States will top the list of standing risk issues to discuss. A board could begin such a conversation with a baseline assessment that includes the following:

• How we got here: historical context of China–US relations
• Where we are now: known knowns and unknowns
• Where we are headed: key watchpoints to track—four likely candidates are human rights and domestic politics; other governments’ positions on relevant policy and trade issues; strategic flash points, such as Taiwan; and trade and technology
• What to do about it: implications of the analysis and how to prioritize decisions about actions to take based on them

Boards can gain perspective by soliciting outside opinions on relevant topics from business and political leaders, embassies and other government agencies, and nongovermental organizations. Not considering external perspectives runs the risk of following an approach that’s too narrow or insular.

Providing a regular forum for a board to examine pressure points and operating realities from multiple perspectives and air diverging views doesn’t just improve decision making and establish an organization’s appetite for risk—it helps create consensus across leadership on the issues of the day. Such a consensus can create a set of guiding principles—and, as importantly, a set of trust-based relationships and mutual understanding across the organization—that enables rapid, purposeful reaction grounded in a shared set of priorities when risk scenarios play out.

Providing a regular forum for a board to examine pressure points and operating realities from multiple perspectives and air diverging views doesn’t just improve decision making and establish an appetite for risk—it helps create consensus across leadership on the issues.

2. Use a trifocal lens to assess potential risks

Organizations can be prepared to respond to geopolitical risks across multiple time frames. Creating short-term, midterm, and long-term response strategies ensures that a company can not only handle a fast-changing situation or emergency but also make the investments needed to seize opportunities and become more resilient.

Short-term actions

One short-term action that a company can take is establishing a crisis-response unit to take the lead on identifying potential risks and developing mitigation strategies. Such a unit could, for example, analyze political events that threaten to disrupt the company’s operations materially or prepare responses to government inquiries into sensitive topics.

Another short-term action is to invest in strategy, PR, and government-relations teams that can serve as the company’s points of contact with senior government officials and key stakeholders in multiple jurisdictions. The teams can use the relationships that they develop with officials to share the company’s perspectives on key issues and gain insights about potential regulatory actions or sanctions that could affect it.

Midterm actions

Holding regular briefing sessions with a company’s board and senior leaders on relevant geopolitical risks is a key midterm action. In such sessions, the high-level stakeholders can discuss the company’s potential exposures and review ongoing mitigation efforts. Discussions can focus on three risk areas: brand and reputation; operational issues, such as cybersecurity strategy; and products, services, and partnerships.

Long-term actions

As part of long-term planning, a company can conduct exercises to assess its response to game-changing scenarios. One test could explore the conditions in which the company may be compelled to ring-fence its IT infrastructure (to protect against cyberattacks or comply with regulatory requirements) or split off its business in a particular region. Such a test would include a time frame for execution and possible technical options.

Long-term planning can also cover such issues as the following:

• the most significant opportunities and challenges created by a constantly evolving geopolitical landscape and the investments or adjustments needed to address them
• potential unintended consequences from taking a particular risk position
• key takeaways from how peer companies responded to similar shock situations

3. Think critically about the corporate narrative

For both internal and external stakeholders, walking a geopolitical tightrope may cause leaders to redefine how they think about and position their companies. Some may, for commercial and strategic reasons, choose to strengthen ties to the countries where the companies are based. Others may opt to identify as global entities because of the access it accords them to pursue business opportunities in emerging markets. But in the age of instant information, the story a company tells about itself in one market won’t stay there. And a narrative that works in one place could inhibit market opportunities in another or create sensitivities among regions.

Part of managing geopolitical risk is considering the ramifications of a company’s core narrative. Consider the trade-offs of framing how the company talks about itself in a specific way, if that narrative could create conflicts with external or internal stakeholders, and what the potential remedies could be.

Part of managing geopolitical risk is considering the ramifications of a company’s core narrative. Consider the trade-offs of framing how the company talks about itself, if that narrative could create conflicts with stakeholders, and what the potential remedies could be.

4. Deploy refreshed risk frameworks and guidelines

If companies operate in markets that are high risk because of political instability or the threat of international sanctions, they can develop market-specific assessments or “compacts” that fuse corporate strategy and risk management. Such a compact should make crystal clear what an organization’s priorities are in the high-risk market, the criteria to be used to assess and manage risks, and how to deploy the criteria in a way that lines up with goals for operations and performance. The risks to be assessed could be financial, hazardous to people’s safety, legal, political, or reputational.

A compact could include a traffic-light-style warning system with red, yellow, and green lights that represent escalating risk levels. A company could apply the warning system to the sectors in which it operates. It could also apply the system to the entities with which it does business, separating those with which a local office can work without needing additional approval from those that need risk approval and those with which an office should never work with.

Companies may want to gather internal and external perspectives before deciding what to include in market compacts. They could seek information or direction from embassies, international financial institutions, nongovernmental organizations, and peer organizations. Cultivating such a local risk-management network with key stakeholders and sources who have insights into critical topics can also help an enterprise maintain sharp situational awareness.

Compacts provide strategic guidance for engaging within a country. Prudent geopolitical risk management also requires understanding how to deal with issues that cross borders. For that reason, a company may need to issue guidance on a range of other topics, such as the appropriate way to discuss geopolitically sensitive topics in publications or speeches and how to depict contested borders on maps.

5. Secure stakeholders’ hearts and minds

Geopolitics is personal. A large organization is likely to have stakeholders with differing cultural reference points and opinions on issues such as human rights and privacy. And differences can dissolve into disagreements about risk and strategy. People may worry that a company will hold itself to different standards in different regions. In a world where nationalistic sentiments are on the rise, no country dominates, and regulations and standards are fragmenting, such situations are bound to accelerate.

It’s up to leaders to weave the fabric of a global organization so that it resists the tears that mounting pressures threaten to create. Leaders can cultivate cohesiveness by bringing key stakeholders to the table to share views on a given engagement or project. In such discussions, it’s of utmost importance to make sure that all affected geographic regions are represented. Otherwise, internal fissures can build and burst in a way that damages culture, reputation, and performance.

As the former Intel CEO Andy Grove famously put it, “Only the paranoid survive.” 5 Andrew S. Grove, Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company , New York, NY: Currency, 1996. With tectonic shifts in geopolitics rumbling from China’s reemergence on the global stage, a climate crisis, and the Fourth Industrial Revolution, companies must be on guard. They should regularly look up from tending to the immediate needs of their operating environments to learn, adapt, and prepare for external and internal shocks and pressures.

Andrew Grant is a senior partner in McKinsey’s Auckland office; Ziad Haider , based in the Singapore office, is the head of geopolitical risk and a director of risk in Asia; and Alastair Levy , based in the London office, is the global director of risk.

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Geopolitics in International Business: Challenges and Insights

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In the current geopolitical context, multinational corporations (MNCs) face a high level of uncertainty and volatility while trying to navigate a changing landscape. This AIB Insights special issue aims to provide the first steps towards articulating novel and actionable insights to guide MNCs as they interact with a rapidly shifting geopolitical environment. Our introductory editorial to the issue first briefly introduces the topic of geopolitics and international business in the current global environment. It then surveys the issue’s five articles. Given current international circumstances, many of the articles revolve around themes of war and peace, but the lessons derived are applicable to any manner of geopolitical risks.

Introduction

In the past decade, geopolitics has become an increasingly prominent topic in boardrooms across the world. The Russian invasion of Ukraine in 2022 and the global pandemic of 2020-2021 have further heightened geopolitical tensions, creating an environment of uncertainty for businesses engaging in cross-border transactions (Ciravegna & Michailova , 2022) . This uncertainty is compounded by the ongoing rivalry between the US and China, which has the potential to bifurcate the world economy and split it into competing blocs (Li , 2022) . At the same time, the rise of populism, both in advanced and developing countries, has led to an increase in political violence in some regions (e.g., Bassou , 2017; Devinney & Hartwell , 2020 ). These shifts have the potential to alter the current world order, moving it away from the unipolar landscape of the late 20th century to a more multipolar one (Acharya , 2017; Grosse , Gamso , & Nelson , 2021) .

In this new geopolitical context, multinational corporations (MNCs) face a high level of uncertainty and volatility when trying to navigate the changing landscape. With stakes much higher than during the 1990s and early 2000s, businesses must find ways to effectively react to geopolitical shifts. Yet, how they should do so is less clear. Should they dust off old playbooks on political risk (Kobrin , 2017) ? There are clear parallels to the 1970s: growing state intervention, a new arms race, and geopolitical rivalry between the two largest world powers. The 2020s, however, are also intrinsically different from the 1970s. In spite of growing rivalry, both China and the US adhere, at least formally, to the world order that emerged after World World II. China is ruled by a Communist Party, but it is also profoundly capitalist, ranking as the world’s top exporter, and the largest economy on purchasing power parity terms. China and the US are also highly interdependent economically, and both would suffer tremendously if the world became truly split into two competing blocs. Do firms need a new toolkit to deal with political uncertainty and volatility? Which strategic actions should they prioritize and how will they remain agile in a world of multivariate threats? These are difficult questions to answer, as MNCs must simultaneously navigate tensions between multilateral and bilateral stakeholders, account for liability of origin in host countries, and align with or fight against national priorities (Li , Shapiro , Peng , & Ufimtseva , 2022) . As such, understanding how to effectively manage geopolitical risks has become a critical task for businesses in the current era.

The Special Issue

The five articles in this Special Issue of AIB Insights provide the first steps towards articulating novel and actionable insights to guide MNCs as they interact with a rapidly shifting geopolitical environment. As the actual situations that firms may face are shifting and geopolitics has become more fluid, the notes format of the journal offers an ideal outlet for thinking rapidly about such crucial issues. Given the current international circumstances, many of the articles assembled here revolve around themes of war and peace, but the lessons derived are applicable to any manner of geopolitical risks.

In the first article, Harald Puhr and Alexander Kupfer (University of Innsbruck, Austria) address an important question: how can managers even identify geopolitical risk? Their article, “Media in the Geopolitical Crossfire: Identification and Novel Data Sources for IB Research,” points to two novel data sources – GDELT and Google Trends – to identify policy uncertainty, stakeholder attention, and issue salience. The usefulness of these tools is illustrated through a case study of Russia’s 2022 invasion of Ukraine.

Secondly, Maria De Villa (Universidad EAFIT, Colombia)'s article titled “Assessing Geopolitical Risk: A Multi-Level Approach for Top Managers of Multinationals,” takes a different approach in assessing geopolitical risks. Aggregating insights of more than one hundred top managers of multinational firms, this article provides a multi-level approach encompassing the supranational, international, national, industry, and firm levels to factor geopolitical risk more effectively into strategic decision making.

The next set of two articles addresses how firms can manage geopolitical risks in the specific context of war. Molly Melin (Loyola University Chicago, USA), Santiago Sosa and Andres Velez-Calle (Universidad EAFIT, Colombia), and Ivan Montiel (University of California, Santa Barbara, USA) examine geopolitical tensions leading to war in their article titled “War and International Business: Insights from Political Science,” framing war as a bargaining failure and presenting five causes of war. They also identify business-for-peace initiatives that may partially attenuate the tensions leading to war.

In “Should I Stay or Should I Go? How Danish MNEs in Russia Respond to Geopolitical Shifts”, Michael Mol, Larissa Rabbiosi, and Grazia Santangelo (Copenhagen Business School, Denmark) examine the responses of five Danish multinationals with operations in Russia to offer a framework for managers. Their framework highlights how corporate responses to geopolitical shifts vary with operational and reputational considerations. They argue firms need increased preparedness and awareness while policymakers must reconsider their strategies for using corporations as geopolitical instruments.

Finally, in their article “Geopolitics of the Digital Economy: Implications for States and Firms”, Thomas Lawton, Stephanie Tonn Goulart Moura, and Damian Tobin (Cork University Business School, Ireland), and Bernardo Silva-Rego (Centro Federal de Educação Tecnológica Celso Suckow da Fonseca (CEFET/RJ), Brazil) examine how geopolitics plays a role in the burgeoning digital economy. Drawing on the theory of structural power, they argue that actors who control the main structural pillars of international political economy – production, security, knowledge, and finance – are critical in determining how firms (and policymakers) navigate digital geopolitics in an age of uncertainty and volatility.

These articles and this Special Issue represent a first attempt to engage with the reality of uncertainty and geopolitical volatility and serve as a call for further and more developed applied research in this area to help guide MNC managers and government policy makers when confronting these issues. Rather than facing the “end of history,” firms are facing its return, and the international business field needs to further explore the ramifications for business in the 21 st century. Additionally, significant opportunity exists to explore how geopolitical issues interact with other global issues. This would include examining geopolitical impacts on achieving sustainability development goals (Zhao , Dilyard , & Rose , 2022) , including United Nations Sustainable Development Goals (Cuervo-Cazurra , Doh , Giuliani , Montiel , & Park , 2022) , and addressing cross-national diversity, equity and inclusion challenges (Newburry , Rašković , Colakoglu , Gonzalez-Perez , & Minbaeva , 2022) , such as refugee integration (Szkudlarek , Roy , & Lee , 2022) .

Please also be on the lookout for additional articles related to geopolitics in international business in the next issue of AIB Insights .

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Research: When Geopolitical Risk Rises, Innovation Stalls

• Vivek Astvansh,
• Wesley Deng,
• Adnan Habib

An analysis of more than 4,600 U.S. companies suggests that the negative impact can persist for three to five years.

The impact of geopolitical conflict on global trade and security is clear. But how do rising geopolitical risk levels affect corporate innovation? The authors cross-referenced data from 4,625 U.S. companies over 32 years with a global index of geopolitical risk to quantify the link between geopolitics and innovation. At a high level, their analysis suggests that geopolitical risk has a substantial stifling effect on private sector innovation, in particular for companies with substantial exposure to foreign markets, and that that negative impact can persist for three to five years after the initial conflict. In light of these findings, the authors offer strategies to help companies minimize the impact of geopolitical risk on their own innovation, but argue that ultimately, the only way to address the underlying issue is for political and business leaders (alongside other key players, such as lawmakers and media platforms) to work together to reduce global tensions and build a more peaceful — and innovative — future.

Geopolitical risk — that is, the wide array of risks associated with any sort of conflict or tension between states — has a clear impact on global trade, security, and political relations. But how does it affect innovation in the private sector?

• VA Vivek Astvansh is an associate professor of quantitative marketing and analytics at McGill University’s Desautels Faculty of Management and an adjunct associate professor at Indiana University’s Luddy School of Informatics, Computing, and Engineering.
• WD Wesley Deng is a finance professor at the business school of the University of New South Wales, Sydney, Australia. He studies how short selling affects corporate performance and managerial decisions.
• AH Adnan Habib is a doctoral student in finance at the Tasmanian School of Business and Economics, University of Tasmania, Australia. He studies geopolitical risk and the spillover of stock volatility from a company to its suppliers and customers.

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Where business and policy meet: Managing geopolitical tensions 

by Simon J. Evenett Published 5 March 2024 in Management • 7 min read

Business leaders need to respond more proactively to geopolitical tensions, while policymakers need to rethink their approach, argues IMD’s Simon Evenett.

Geopolitical tensions are causing businesses worldwide significant problems – and research from IMD suggests that they may have underestimated their scale. In a new paper for the World Economic Forum , IMD argues that business leaders and policymakers must now take decisive action.

Geopolitical tensions take different forms, but, as IMD points out, they all contribute toward the deterioration of global trading conditions. From full-blown conflicts, such as Russia’s war with Ukraine, to complex rivalries, including the US’s fractious relationship with China, problems have escalated in recent years. The crisis in Gaza – and the associated threat to shipping in the Red Sea that has arisen in recent months – is just the latest outbreak. Around 75% of corporate filings to the US Securities and Exchange Commission (SEC) in 2023 cited geopolitical factors driving risk assessment and business decisions.

These factors influence businesses across multiple dimensions, undermining the benefits of global trade. Companies worldwide have seen revenues fall and costs increase due to geopolitical tensions. As a result, many have felt compelled to scale back operations in certain territories and markets.

How businesses can respond better to geopolitical tensions

There are limits to how much business leaders can do in response to geopolitical situations. However, IMD argues it would be a mistake for businesses simply to accept the negative impacts of geopolitical rivalry. There is much more that corporate executives and board members can do to manage the complex dynamics in which they are caught up.

First, it’s essential that management teams spend time considering what geopolitical tensions could mean for their businesses. Not only do current market conditions demand this, but the work done to explore these impacts itself has value. It will enable many companies to secure a granular understanding of what cross-border trade contributes to their business in terms of revenues and profit, but also as a means of managing cost, diversifying risk, and accelerating innovation.

“Geopolitics is all about leverage. We cannot make ourselves safer abroad unless we change our behavior at home.”

A valuable part of this exercise is increasing the business’s understanding of the geopolitical dynamics that affect it – which rivalries and tensions are most significant, where the impacts are likely to be most keenly felt, and the likely future direction of travel. Business leaders and operational units alike will benefit from such increased understanding. Some companies have made tactical appointments to their boards, including former public officials, to enhance their access to insight. However, while commendable, this is unlikely to be enough.

Businesses must also consider how they will respond strategically to challenges arising from tensions. Siloed, functional responses will fall short because they will fail to consider the holistic effect that such tensions are likely to have across the business.

Government affairs units, for example, may provide valuable advice to the rest of the business, as well as a point of liaison with policymakers, but leaving such teams to manage the fall-out by themselves would be short-sighted. Many companies have established a strategy team close to the senior leadership to organize a cross-functional approach to mitigating geopolitical risk.

It’s important to be positive and seek to identify opportunities as well as risks. Disruption in one geography or market may prompt businesses to explore alternative sources of revenue and growth – in new markets and under-served market segments, for example.

More optimistically minded business leaders recognize that even significant geopolitical disruption tends to be localized. In other parts of the world, many governments continue to look to strengthen cross-border trade; Southeast Asia and Africa are prime examples of current global issues.

Moreover, even where the focus is on risk rather than opportunity, there are steps businesses can take to protect themselves, intervening now to future-proof current and planned operations and investments. By planning on a company-wide basis for plausible scenarios – the re-election of Donald Trump, say, or a Chinese invasion of Taiwan – businesses can identify pre-emptive measures and their specific responses.

A related imperative is for businesses to be explicit about their risk appetite. This requires executives and directors to discuss the exposures they are prepared to accept in individual geographies, weighing opportunity against potential negative impact. Companies that engage meaningfully in such conversations will be in a much stronger position to decide where and how they want to reduce risk – and where they want to eliminate it entirely.

IMD also believes organizations are often stronger when acting with ecosystem partners. There will be times when businesses should act jointly – to push for de-escalation of particular tensions, say, or to advocate a reset of relations. National, regional, and pan-regional business associations can be powerful actors in encouraging governments to talk more positively to one another.

All businesses have a role in helping governments develop policy and strategy. Leaders should look for opportunities to engage early in policy formulation; in many cases, they may be better informed about conditions on the ground in particular markets and territories than government officials and have a stronger grasp of the likely repercussions of different policy approaches.

How policymakers should respond

For companies that have made considerable investments in overseas trade during an extended period of globalization, the negative impact of geopolitical rivalry will inevitably have serious consequences, impairing financial performance and even stranding assets. This threatens to undermine global economic growth – and, therefore, to damage the wealth and living standards of billions of people worldwide.

On this basis, and as conflict and rivalries intensify, IMD argues that governments and public policymakers now need to support businesses. While it may not be possible to de-escalate international tensions, policymakers should be aware of potential repercussions for businesses when setting foreign policies to protect their countries’ commercial interests.

IMD’s research makes 9 recommendations in this regard:

Recalculating cost-benefit

In past years, globalization and cross-border trade have been seen as a source of unalloyed good. But policymakers have recently begun to question this thinking; they increasingly see the potential harm in allowing the free flow of data, investment, trade, and people.

In that sense, business and trade are themselves a potential source of geopolitical tension, as well as victims of broader rivalries. Governments and businesses need to work together, sharing information and perspectives so that both can gain a strategic advantage in negotiating the fallout of geopolitical tensions.

Simon J. Evenett

Professor of International Trade and Economic Development at the University of St. Gallen

Simon J. Evenett is currently a Professor of Economics at the University of St. Gallen and on 1 August 2024 will join the Faculty at IMD. He is also  Co-Chair of the WEF’s Global Council on Trade & Investment and the Founder of the St. Gallen Endowment for Prosperity Through Trade, home of two of the leading independent monitors of how governments shape international business.

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Turning Geopolitical Risk into Strategic Advantage

March 30, 2021  By  Clint Follette ,  Marc Gilbert ,  Ilshat Haris ,  Michael McAdoo , and  Pattabi Seshadri

In volatile times such as these, a company’s instinct is to focus on defense—to protect the business from harm. Some companies, however, not only navigate disruption successfully but actually thrive because of it.

These organizations take many forms. They’re the technology companies and oil producers that can tell a political backlash is brewing well before it hits full force and then use their foresight to reposition their businesses ahead of competitors. They’re the equity investors that reap rich returns by snapping up stakes in undervalued—but sound—assets in the challenging emerging markets that others shun. They’re the industrial goods companies that shift production from one country to another because they correctly predict that rising protectionist sentiment in some key markets will lead to trade actions that will alter the economics of manufacturing .

What’s their secret? According to our research, the consistent winners apply a highly developed approach to geopolitical risk management that emphasizes opportunity rather than just mitigation, involves the entire organization, and leverages sophisticated and robust analytical processes.

A Wide Variety of Approaches to Risk Management

The value of being able to anticipate, synthesize, and harness risk for potential gain has never been greater. Global geopolitical risk and economic uncertainty have increased dramatically over the past decade, according to leading indices. (See Exhibit 1.) What’s more, the COVID-19 pandemic has brought geopolitical risk factors into sharp relief. The ability to proactively navigate turbulence can mean the difference between prospering through a crisis or falling victim.

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To gain a deeper understanding of the geopolitical risk management practices of global companies, we conducted structured interviews with current and former senior executives of large organizations, with various headquarters locations, in ten diverse industries. We evaluated their organizations’ approaches along three dimensions: the strategic role of geopolitical risk management within the company, the ways in which different parts of the organization are leveraged, and the use of risk management processes and tools.

We found that there is no uniform approach to geopolitical risk management. Even leading global companies within the same industry can differ sharply, depending on their corporate cultures and geopolitical risk appetites. We grouped companies into four general archetypes according to the extent to which they recognize and act on opportunities arising from geopolitical shifts—in addition to mitigating the downside risks—and the intensity of focus and sophistication of processes with their organizations. We call these archetypes holistic-risk evaluators, risk entrepreneurs, systemic-risk managers, and nascent-risk managers. (See Exhibit 2.)

Holistic-risk evaluators have the most highly developed geopolitical risk management operations. They view disruption strategically, as a source of opportunity; embed risk management practices across the organization; and use advanced geopolitical-risk-monitoring tools and processes. Not surprisingly, several oil and gas companies—which often make large, long-term investments in high-risk countries amid frequently shifting environmental-protection policies—fall in this category. But so do some pharmaceutical, technology, and packaged goods companies.

Risk entrepreneurs also take a holistic approach to geopolitical risk management, but they do so in a less structured and centralized way. Systemic-risk managers adopt a primarily defensive position, focusing on protecting their businesses from the downsides of change. Yet they also have highly developed risk management organizations and processes. Nascent-risk managers use an almost entirely defensive strategy, with minimal organization and processes.

The Strategic Role of Geopolitical Risk Management

The most successful opportunists carefully monitor any situation that may, at first glance, appear to be a threat. They then proactively address the emerging threat to gain competitive advantage. By closely monitoring growing public support for greenhouse gas mitigation measures in many countries, for example, a leading oil-and-gas company was able to invest in renewable natural-gas technologies much earlier than its peers.

The most successful opportunists carefully monitor any situation that appears to be a threat and then proactively address it to gain competitive advantage.

A major global technology company offers another good illustration. The organization saw a troubling trend in a number of key markets that could potentially threaten its growing cloud-storage business: mounting anxiety on the part of policymakers and customers, who were worried that local governments could access confidential data kept on servers in certain countries. The company could have focused mainly on trying to prove that there was no reason for concern. Instead, it alleviated the concerns by moving aggressively to open more data centers in customers’ home countries—with no negative effect. As a result, the company was able to significantly expand its cloud business and gain advantage over competitors that were slower to act.

Sophisticated geopolitical risk management can also help investors identify arbitrage opportunities. “We are constantly searching for overlooked assets where we can navigate the risk, while others are unwilling or unable to,” an executive of a private-equity firm with a decades-long record of success in emerging markets told us. “Our Asia-Pacific footprint is now a huge advantage.”

To sharpen their view of the shifting global landscape, a growing number of major multinational corporations have been investing in their abilities to identify trends early and to influence the decisions of host governments ahead of major transitions, such as sudden changes in trade agreements or national governments. Companies also have been attempting to measure the impact of their lobbying efforts on governments, such as by benchmarking the success of their advocacy compared with that of their industry peers or estimating potential cost savings.

Quantifying return on advocacy is difficult, however. Sometimes, the payoff is simply that the company can continue doing business as usual. One Western energy company, for instance, credited the skills and transparency of its government relations staff for being able to operate simultaneously in two Middle Eastern nations despite strong political tensions between the two governments.

In extreme cases, a disruptive event can jeopardize an entire business. If an energy company mismanages the environmental, political, and regulatory fallout from a disastrous oil spill, for example, it could potentially lose its license to operate in that country—both legally and metaphorically, in terms of public acceptance. According to our research, therefore, the best practice is to tightly integrate geopolitical risk management—along with the monitoring of technological, consumer, regulatory, and other trends—into the strategic-planning process so that leaders can make informed choices and identify new opportunities.

Involving the Entire Organization

Most companies do not have a dedicated team of full-time employees devoted to geopolitical risk management. Instead, they depend on personnel from government relations, strategy, and other business functions to identify and mitigate risks, with one function coordinating and consolidating input.

Every organization we studied relies on input and expertise from the field.

Every organization we studied relies on input and expertise from the field. Successful geopolitical risk managers tend to hire a cadre of personnel with experience in doing business in the market and dealing with local agencies. To ingrain the importance of external relations throughout their organizations, some companies rotate high performers and potential candidates for upper management into country leadership positions, where risk management becomes one of their duties. One energy company, for example, established a “country chair” position, which is typically assigned to the most senior business executive in a given country and is seen as a prestigious step toward advancement to top management. In addition to their normal duties, country chairs are responsible for liaising with all external stakeholders—including national and local governments, community organizations, and other enterprises.

A strong cross-functional interface is critical, especially for companies that take a holistic approach to risk assessment. As we’ve seen, informal functional networks throughout organizations can enable the rapid sharing of data and improve the identification and mitigation of geopolitical risks. One consumer packaged goods company we studied has developed a strong knowledge-sharing culture among functional networks. Because the company sells its products almost everywhere, problems that pop up in one country often may have already been solved in another. A quick message or email to the global functional marketing, finance, or risk community, the company told us, allows for rapid troubleshooting, the cross-pollination of insights, and the sharing of best practices.

The Use of Processes and Tools

Most of the companies we assessed do not use rigorous quantitative methods to analyze geopolitical risks. In-depth analysis, they recognize, does not come solely from algorithms. The companies with the most disciplined approach, however, often use a combination of processes and tools to look at risks during different time frames and with different rates of periodic review.

A holistic view uses four lenses: global geopolitical trends and scenarios, ongoing operations, investment decision making, and frequent monitoring of evolving events and development that can affect the business. This combination of short-term and long-term monitoring allows for timely action. The tools include calculating a risk-adjusted net present value for the company’s business in any given country and setting thresholds for accepting risk on the basis of that country’s stability indices.

Developing Holistic Capabilities

Building a more holistic and entrepreneurial approach requires action in all three dimensions: enhancing the strategic role of risk management, ingraining it into the organization, and developing robust processes.

Assessing Approaches to Geopolitical Risk Management

To enhance the role of geopolitical risk management and thus create tangible business opportunities, leaders should take the following steps:

• Integrate geopolitical signals and risk assessment into strategic-planning processes and define actionable strategies to both protect the business and take advantage of emerging opportunities.
• Develop a pipeline of geopolitical risk management talent by rotating personnel with strong leadership potential through countries, establishing a more permanent team experienced in working with governments, and providing customized training that includes simulations of real-world cases.
• Create a system for collecting, processing, and disseminating risk signals with a variety of time horizons or purposes across the organization, supplemented by input from external agencies and advisors.
• Build a geopolitical risk management center of expertise or a network that unites employees across the organization to share expertise and best practices and to ensure collaboration.
• Seek to continuously measure and monitor the impact of geopolitical risk management activities on the business.

“In every risk there is also an opportunity” is a well-worn adage. Yet few companies consistently act on it. In a global business environment characterized both by hypercompetition and intensifying geopolitical headwinds, it is no longer enough for companies with global footprints to only react defensively. Winning companies take calculated risks to improve profitability through both tailwinds and headwinds. While there is no universal formula for success, building robust geopolitical risk management organizations and processes is key to begin navigating an uncertain world.

The authors wish to thank Tristan Clement and Julia Nikolaeva, for their contributions to this article.

Managing Director & Senior Partner

Managing Director & Partner

Partner & Director, Global Trade & Investment

Managing Director & Senior Partner; Global Leader, Energy Practice

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Peering through the fog: How businesses can turn geopolitical risk into opportunity

By charles bauman , account manager.

23 February 2024

For nearly two-thirds of global businesses , geopolitics is the top medium-term risk and they expect geopolitical events to impact the way they do business over the next five years. In 2022 alone, 93% of global companies reported losses due to political instability. As global firms navigate through the geopolitical fog, knowing how and what to communicate externally is crucial.

What are geopolitical events and what consequences do they have for business operations?

Most geopolitical events fall into one of the following categories:

• Political instability and conflict : This includes risks from war, terrorism, coups, civil unrest, and wider political instability, disrupting business operations, supply chains, and markets. Such instability can also lead to the imposition of sanctions, expropriation of assets, or changes in government policies that negatively affect businesses.
• Geopolitical tensions and trade wars : Rising tensions between countries can lead to changes in trade policies that start trade wars, sanctions and embargoes, disrupting global supply chains and affect commodity prices.
• Cybersecurity and information warfare : In the digital age, geopolitical conflicts can also manifest in cyberspace through state-sponsored cyber-attacks, espionage, and information warfare. Attackers can target critical infrastructure and steal intellectual property, posing significant risks to companies’ security and competitive position.

These events, whether on their own or in unison, disrupt business operations and force firms to shift strategies – with a tailwind effect on their external communications.

National responses to geopolitical risks – how should business communications react?

We are seeing nations increasingly use their own policy toolkits to mitigate the risks from conflict and competition on the world stage. For example, countries are using more protectionist and autarkic measures to insulate their economies from shocks to the global economic system. This is not just responses to the immediate challenges at hand. Rather, it represents a proactive approach to safeguarding national interests and promoting the strength of domestic enterprises in the face of a systemic shifts away from globalisation.

For businesses, this evolving landscape means communicating through an economic “fog of war”. Unpredictability and the potential for rapid change necessitate a solid understanding of geopolitical dynamics, especially in key markets.

Here are four geopolitical issues and business communications strategies to tackle them:

• Diversification of supply chains

The push for semiconductor reshoring, highlighted by the CHIPS and Science Act in the US and the European Raw Materials Alliance (ERMA), illustrates the strategic pivot by both blocs to secure their supply chains. For many firms, this requires uprooting operations and moving to either a friendlier country, one close to the home market, or back to the home market itself.

Firms need to navigate the complexities of disclosing strategic moves, balancing transparency with competitive considerations.

• Strategic trade agreements

Several countries are actively pursuing diversification through agreements like the CPTPP , the EU and MERCOSUR and the ongoing US and UK trade talks. This reflects a calculated effort to broaden economic ties and reduce dependency on a single, potentially hostile, entity.

Companies should develop targeted communication campaigns to leverage these agreements, emphasising their operation in safer markets and the benefits of reduced trade barriers.

• Trade barriers and protective measures

The trade tensions between the United States and China and Carbon Border Adjustment Mechanism (CBAM) are displays of a broader strategy to protect industries and assert a geopolitical stance through economic means. These actions are the inverse of trade agreements as they decrease access to markets for firms from less favourable jurisdictions.

Decisions on how to address these barriers require careful planning to align communication with business interests and those of the wider public.

• Industrial policy

The United States’ Inflation Reduction Act and the EU’s Net-Zero Industry Act (NZIA) exemplify how nations are using policy tools to drive domestic production of critical technologies and green infrastructure. The widespread adoption of industrial policies across 84 countries, representing 90% of global GDP , highlights a global trend towards reinforcing economic sovereignty.

Businesses should communicate how they align with or benefit from these policies, emphasising their role in supporting the aims of such policies.

Navigating through the fog

What businesses require is a communications strategy that is not only reactive but also anticipatory, allowing firms to operate effectively amid uncertainty. Businesses that excel in developing such a communications strategy are better positioned to not just weather the storm but to emerge more robust, ready to lead in the new economic realities that lie ahead.

Leverage your business communications in managing geopolitical challenges in three ways:

• Be proactive: Develop a communications strategy that anticipates geopolitical shifts to ensure effectiveness amidst uncertainty.
• Engage with external stakeholders: Maintain open lines of communication with public leaders and external stakeholders to secure support during geopolitical upheavals.
• Navigate sensitivities with finesse: Craft messages with careful consideration of emotional and political sensitivities to manage your company’s reputation effectively.

These approaches to managing geopolitical risks not only ensure business continuity but will also open new avenues for growth. In 2024, those who are bold and equipped with a strategic communications framework are not just surviving; they are set to thrive.

You can get in touch with Charles and the rest of our communications tea m here .

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Shifting political risk perceptions amid geopolitical tensions, ‘gray zone aggression’.

As geopolitical tensions escalate around the globe, multinational companies are being forced to confront a new reality of heightened political risk. The 2024 Political Risk Survey Report by WTW and Oxford Analytica reveals how corporate risk perceptions and losses have shifted dramatically in recent years, especially as the shock waves from the conflict in Ukraine reverberate through the global economy.

The focus of political risk concerns has shifted from Asia in 2022 to Europe and Russia in 2023-2024. The impact of the Ukraine conflict has been felt through various types of political risk losses, including currency inconvertibility, losses attributed to Western sanctions, and even an uptick in expropriations as the Russian government nationalized foreign investments, according to the report.

In 2023, there was a tendency to see disaster looming around every corner, with close to half of survey respondents claiming that every geopolitical trend would “greatly strengthen.”

However, in 2024, there is more differentiation in the perception of these trends. While 30% of respondents predicted that “geostrategic competition” would “greatly strengthen” in 2024, but for most other geopolitical trends, roughly 15 % or less have the same expectation, the report noted. Economic nationalism and social unrest are seen as “increasing,” while geostrategic competition and populist politics are viewed as “strongly increasing.”

Rise of ‘Gray Zone Aggression’

A new trend that has emerged as a mainstream business concern in 2024 is “gray zone aggression.” Elisabeth Braw, a senior fellow with the Transatlantic Security Initiative at the Atlantic Council, defines gray zone aggression as an action that takes place “in the gray zone between war and peace and is used to weaken a country using means short of war.”

Gray zone aggression provides a major advantage for perpetrators, as conventional means of deterrence, such as economic sanctions or military action, are only weakly effective against gray zone actors. This is because the intent of the action and the identity of the perpetrator may be difficult to discern, the report stated.

The Houthi attacks on merchant and naval vessels amid the ongoing conflict in Israel have brought gray zone aggression to the forefront of business concerns. Despite U.S.-led airstrikes against the Houthis, there were multiple severe attacks in the first quarter of 2024, resulting in the sinking of a vessel and the loss of sailors’ lives. The Houthi attacks also highlight the vulnerability of offshore assets, such as ships and oil platforms, which were traditionally seen as low risk due to their location out of harm’s way. However, new technologies that enable remote attacks have made these assets ideal gray zone targets, especially when located in international waters, according to the report.

The Costs of War

The shock of losses in 2023 due to geopolitical events was extreme, with over 90% of companies reporting a political risk loss. While not quite as severe, 2024 saw a similarly high level of losses, with 72% of respondents reporting losses, on par with 2022. Supply chain disruption was the most common cause of loss in 2024, the report found.

The financial impact of the conflicts in Ukraine and Israel varied significantly. Over 40% of respondents reported a net adverse impact from the events in Ukraine and Russia, with a striking 20% indicating a material impact that required a restatement of earnings. In contrast, 34% reported a negative impact from the conflict in Israel, with only 4% experiencing a material negative impact, per the report.

The trend of political risk losses occurring in major economies continued in 2024. Prior to 2021, losses tended to occur in obviously risky countries with relatively small amounts of foreign direct investment, usually in natural resources. However, from 2022 onward, losses began to occur in major economies such as Russia and India. In 2024, Russia, China, and the U.S. were the most frequently reported countries of loss, with losses in the U.S. presumably due to sanctions and export control policies, according to the report.

New Capabilities and Approaches

Companies are clearly adapting to a “new normal” of significant political risk losses, with 96% reporting they added new political risk management capabilities in 2024.

The most popular new capabilities centered around enhancements to corporate processes, implemented by 60% of respondents. Standing up new cross-functional teams and making new hires were also frequently reported steps.

In terms of risk management techniques, proactive risk identification and monitoring remained the go-to approach, the report found. Scenario planning and scenario-based stress testing also continued to be popular. However, the use of financial techniques like assigning a risk premium or adjusting the discount rate declined, likely because when geopolitical events are not accurately forecast, these precise financial assessments end up being precisely wrong.

Panelists emphasized their reliance on scenario planning in the current environment.

“We are using scenario planning with a shorter time horizon,” said a panelist in the energy sector. “Because uncertainty is so high, we do scenarios about the near future, not just ten or twenty years into the future.”

A mining sector executive reported using “course of action development and scenario planning based on worst case, most realistic, and ideal scenarios.”

Top Political Risks

As we look ahead to the rest of 2024, the report identified the top risks that businesses and policymakers cited most frequently.

Topping the list of concerns is the potential for further complications and escalations in the ongoing conflict in Ukraine. The war has already caused significant political risk losses, and as one panelist in the European health care sector noted, a Russian decision to escalate the conflict could be an “existential concern.”

Coming in second is the fact that 2024 will be a major year of elections, with national elections scheduled in more than 70 countries, including the U.S., India, and for the European Parliament.

The third top risk is the escalating rivalry between the U.S. and China. Panelists are particularly worried about what actions the U.S. might take in its efforts to maintain global dominance in the face of China’s rise, per the report.

Fourth on the list is the uncertainty surrounding climate policy, as diminished international cooperation and populist backlash against transition costs collide with the increasingly obvious impacts of climate disasters.

Rounding out the top five is the risk of companies mismanaging their exposure to China. As two different European panelists coincidentally noted, “The greatest difficulty the firm faces is dealing with China.” Even slight missteps could lead to exclusion from one of the world’s most important markets, a risk that is becoming harder to navigate.

To obtain the full report, visit the WTW website . &

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Sponsored Content by BHSI

Parametrics have emerged as a valued cat risk transfer solution. here’s what’s next as the market continues to grow.

Many insureds have turned to parametrics to address the hardening commercial property insurance rates of the past few years.

And while some thought interest in these alternative risk transfer products would wane as rates softened, inquiries about parametrics remain strong even as experts predict rates will moderate in 2024. Parametrics are becoming a permanent part of the risk management tool kit.

“Despite the easing market conditions in the traditional property space, where it’s becoming easier for customers to fully fill out their programs, we’re still seeing an increase in submissions for parametric solutions this year following an unprecedented year of submission growth in 2023,” said Scott Johnson, head of property, Eastern region, Berkshire Hathaway Specialty Insurance (BHSI).

“This growing interest shows us that parametric products are valuable through all market cycles.”

Effective Risk Management, No Matter the Market Conditions

Scott Johnson, Head of Property, Eastern Region, Berkshire Hathaway Specialty Insurance (BHSI)

One reason parametrics have remained relevant is that insureds now better understand how to use them. Carriers and brokers have worked to educate customers, and today they’re using the policies as an effective complement to traditional property covers, rather than a substitute.

“People are now more aware of how to integrate these products effectively, leading to a growing desire to purchase them for the right reasons,” Johnson said.

As terms have tightened in recent years, parametrics have helped close gaps in property insurance coverages.

“Traditional insurance, although it typically provides broad coverage, still leaves the insured with meaningful retained risk through exclusions, deductibles or sublimits,” Johnson said. “By purchasing a parametric policy, the policyholder can receive funds to help reduce their exposure.”

Insureds also appreciate the immediate financial relief parametrics provide. Since the policy automatically pays out if a specific predefined event occurs, insureds often receive claims payments in 30 days or less.

“This can be a lifeline for customers who have experienced significant losses and need immediate financial support while waiting for their traditional policy to adjust over time,” Johnson said. In recent hurricane events, BHSI has paid out claims in less than seven days.

Choosing the Right Parametric

Interest in parametrics might be high, but insureds must carefully assess their needs to ensure they’re selecting a product that fits their exposures.

“We often see customers proactively approaching us with specific gaps in their coverage,” Johnson said. “They identify areas where they are looking to transfer risk and express concern about potential events that could expose them to that risk.”

Brokers can be a great starting point for these conversations. Many brokerages have brought on specialized parametric brokers who can help insureds assess their risks and find policies tailored to their needs. Informed brokers can help their customers understand products from different companies and the value each solution offers.

“Many brokers have invested in specialized talent who are knowledgeable about parametrics,” Johnson said. “We welcome the opportunity to sit down with a broker and work collaboratively and transparently to optimize the solution for a customer, provide different iterations, and walk through the coverages we can provide.”

Johnson added that “ultimately, the customer wants to purchase something that adds value to their program with a clear understanding of when it will pay out.”

BH FastCAT: A Winning Parametric Solution

Since BHSI launched its parametric product, BH FastCAT, it has cultivated a large, integrated team with deep knowledge of the CAT space. It’s been writing parametric policies since 2020, and its underwriters are excited by the growing awareness and customer appetite to explore parametric solutions.

“BHSI has always been a significant player in the catastrophe insurance market, and we will continue to be. We have invested heavily in understanding catastrophe perils to ensure we can provide stable capacity for our customers,” Johnson said.

“We have brought in talented individuals to help us better understand the various natural catastrophe perils. This investment in expertise has been instrumental in developing products that meet our customers’ specific needs.”

BH FastCAT policies are designed to be consistent and clear for insureds. That process starts with the concise eight-page policy.

“​​Our product is built on the principle of transparency,” Johnson said. “It clearly outlines the process and what gets paid when an event occurs, ensuring clarity for all parties involved.”

BHSI’s parametric policies use quality data from reputable government agencies to determine when an insured event has occurred. These agencies report data in a timely and unbiased manner, allowing the claims process to start promptly.

“This approach allows all parties involved — the broker, the customer and our company — to see in real time whether a policy has been triggered based on the reports from these agencies. By using trusted sources and making the information accessible to everyone simultaneously, we maintain a high level of transparency throughout the process,” Johnson said.

“Our claims team is engaged from the moment the event occurs.”

By emphasizing transparency and creating policies that pay out quickly, BHSI has crafted a parametric solution that works in tandem with an insured’s property policy.

“The challenges of the past few years have highlighted the importance of understanding the different insurance options that are available in the market,” Johnson said. “What we aim to provide is a product that is consistent and clear — one that customers can confidently rely on for the long term — no matter the market conditions.”

To learn more, visit: https://www.bhspecialty.com/ .

Berkshire Hathaway Specialty Insurance ( www.bhspecialty.com ) provides commercial property, casualty, health care professional liability, executive and professional lines, transactional liability, surety, marine, travel, programs, accident and health, medical stop loss, homeowners, and multinational insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Columbia, Dallas, Houston, Indianapolis, Irvine, Los Angeles, New York, Plymouth Meeting, San Francisco, San Ramon, Seattle, Stevens Point, Adelaide, Auckland, Barcelona, Brisbane, Brussels, Calgary, Cologne, Dubai, Dublin, Frankfurt, Hong Kong, Kuala Lumpur, London, Lyon, Macau, Madrid, Manchester, Melbourne, Munich, Paris, Perth, Singapore, Sydney, Toronto and Zurich. For more information, contact [email protected] .

The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.

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Rise in geopolitical threats worries business leaders

• Global economy and markets
• Governance and risk

CEOs worldwide are a lot less optimistic about economic growth than they were a year ago, partly because they worry that rising geopolitical and geo-economic risks will take their toll on business revenue over the next three years, research by PwC suggests.

Of nearly 1,400 CEOs PwC surveyed across the globe, 29% said they believe global growth will decline in 2019, up from 5% the year before. The number of respondents who were confident their companies’ revenue would improve over the next three years dropped to 36%, from 45% in 2018 and 51% in 2017.

Optimism dropped most sharply amongst CEOs in North America, from 63% in 2018 to 37% in 2019. CEOs in Asia Pacific remain the most optimistic about global economic growth.

The survey also found that views about top threats have changed to being less existential and more related to the ease of doing business. The top ten risk factors on respondents’ minds this year are:

• Over-regulation.
• Policy uncertainty.
• Availability of key skills.
• Trade conflicts.
• Cyber threats.
• Geopolitical uncertainty.
• Protectionism.
• Speed of technological change.
• Exchange rate volatility.

Risks that dropped out of the top ten list in the past year were terrorism, climate change and environmental damage, and increasing tax burden.

The impact of rising geopolitical and geo-economic risks is also highlighted in a 2019 global risk management survey by British insurance company Aon. Respondents ranked economic slowdown as their top concern in 2019. Erratic trade policies, large-scale geopolitical conflicts, and frequent financial market turmoil in the past two years pushed concerns about accelerated rates of change in market factors into third place, from 38th in 2017. And concerns about distribution or supply chain failure moved up seven spots into 12th place.

“Nations tend to protect their economy and local industries by instituting trade restrictions and import tariffs,” said Oluseyi Olanrewaju, FCMA, CGMA, the CFO of the Africa business of British multinational telecommunications company Vodafone. Nigeria, for example, he said, put off signing the framework agreement for establishing the African Continental Free Trade Area (ACFTA) following protests by large domestic labour unions concerned the deal would negatively affect the local economy.

Strategic adjustments

The shift in risks is prompting adjustments in business strategies, according to the PwC survey. Two-thirds of CEOs who are extremely concerned about trade conflicts are taking a fresh look at their supply chains and alternative markets and delaying foreign direct investments and capital expenditures.

For example, India is enjoying increasing popularity as an investment market, while the US has become less attractive, particularly amongst CEOs in China. The number of Chinese CEOs who consider the US as their top market plummeted to 17%, down from 59% in 2018.

CEOs are also adjusting activities to drive revenue growth. Overall, 77% said they focus on operational efficiencies and 71% on organic growth. Fewer than half said they plan to launch new strategic alliances, enter new markets, pursue mergers and acquisitions, or collaborate with startups.

Internal initiatives to improve operational efficiencies are particularly popular amongst CEOs in Africa and Western Europe.

Rapid technological changes and competitors charging less for comparable services are the business threats that worry Olanrewaju the most. Tariffs that raise the price of imports and regulatory restrictions that erect barriers to entry in offshore markets also play a role.

“As a response, we focus on the local market and strive to increase our market share,” he said. That includes institutionalised quality control and service delivery, domestic sourcing and renegotiation of foreign contracts, and a push to increase market share through product innovation and diversification.

Rising geopolitical and geo-economic risks

A rise in isolationist and protectionist sentiments and political tensions has triggered tariff tit-for-tats, economic sanctions, and the uncertainties surrounding Britain’s plan to exit the EU. In 2019, these geopolitical and geo-economic risks are expected to increasingly affect businesses by threatening economic slowdowns and disruptions to supply chains, according to a report by insurance broking and risk management firm Marsh.

The report highlights the following geopolitical and geo-economic risks by region:

North America. Following the longest shutdown of the US government at the beginning of the year, domestic politics in the US are expected to become more combative. A divided Congress is likely to hold up policy formation and enactment. Trade tariffs could escalate. Bilateral relations with Russia are unlikely to improve.

Europe. Uncertainties about Brexit and how it will affect supply chains and labour mobility continue. Elections in multiple European countries are expected to cause transitions. The EU could face a leadership vacuum in a key member nation if German Chancellor Angela Merkel steps down early.

Latin America. Political risks have improved in several Latin America countries, including Guatemala, Chile, and Paraguay. The situation in Venezuela, however, is expected to remain volatile, with inflation expected to reach 10 million per cent.

Africa. Political risks improved considerably as new political leadership ended public protests in South Africa, a peace deal materialised in Sudan, and the likelihood of a peace deal with rebels increased in Mozambique. However, social tensions and unrest rose in Zambia, Mali, Algeria, Tunisia, Cameroon, and the Central African Republic.

Middle East. The ongoing conflict in Syria could raise tensions between Russia and the US. Following the US withdrawal from the Iran nuclear deal and re-imposition of US sanctions on Iran, the US could increase pressure on Iran and raise the possibility of a military confrontation. That could disrupt global oil supplies.

Asia Pacific. Border tensions between North and South Korea are expected to decrease. Tensions between China and the US over tariffs, human rights, and technology transfers continue. Also, China’s economic growth is expected to slow below 6%.

—  Dan Holly  is a freelance writer based in the US. Sabine Vollmer is an FM magazine senior editor. To comment on this article or to suggest an idea for another article, contact her at [email protected] .

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About Us Press Release

Geopolitical tensions creating challenges for Swiss firms – though high proportion moving into new business areas despite crises

Further information Pascal Zumbühl Economist, Policy & Thematic Economics Credit Suisse AG +41 44 334 90 48 [email protected]

Dr. Sara Carnazzi Weber Head of Policy & Thematic Economics Credit Suisse AG +41 44 333 58 82 [email protected]

Media Relations Credit Suisse AG +41 844 33 88 44 [email protected]

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Credit Suisse economists today published a study on how geopolitical tensions are creating challenges for Swiss firms. A survey of 650 companies shows that a clear majority are impacted by geopolitical strains including non-tariff barriers, increased regulatory density and business risks, as well as constraints on cross-border cooperation. The firms are defying these challenges through adjustments to their value chains, measures to combat higher input prices, and strategies to minimize reputational risks.

The global situation was already tense when the war in Ukraine began in February 2022. A world order founded on open markets and deepening trade relations had already started to crack due to the global financial crisis and then the pandemic. In the study published today, the Credit Suisse economists examine the question of how companies are faring in these turbulent times given the major importance of international business relationships to the Swiss economy. Their analysis is based on a survey of 650 Swiss companies. To address size-specific differences, this year's study surveyed 50 large companies as well as the SMEs.

Business relationships under pressure The survey shows that geopolitical tensions are becoming apparent in day-to-day business life, with Swiss companies having seen an increase in business risks over the past three years. These risks are particularly pronounced in the case of Russia and Ukraine, although business risks outweigh business opportunities in Argentina, Iran, and New Zealand as well. Unsurprisingly, the list of countries from which Swiss companies have withdrawn in the last three years is headed by Russia: Around 6% of all companies surveyed have left the country – indeed among large companies the figure is 24%. Even so, a few of the big companies in particular are already planning to begin or resume business activities in Russia.

However, the impact of geopolitical tensions is not confined to companies that do business in high-risk countries: Around 40% of the companies surveyed detected negative reactions from business partners as a result of Switzerland's decision to support the international sanctions against Russia in spring 2022 (see chart). The survey provides clear evidence of the importance of Switzerland's neutrality for local companies, with over three-quarters of those surveyed stating that Switzerland retaining its neutrality was in their interest (see chart).

Various hurdles creating challenges for companies Companies are affected not only by sanctions but also by customs duties and other non-tariff barriers such as government procurement regulations and approval procedures. The survey results also point to an increase in red tape: 54% of the companies surveyed said they had been affected by the increase in data protection regulations both in Switzerland and internationally over the past three years, while 51% said the same applied in the case of environmental red tape. The legal situation in relation to environmental matters in particular is changing rapidly, with the European Union (EU) playing a leading role in this regard: Companies with an EU focus reported a greater increase in regulatory density compared to those without a strong EU focus. Anti-competitive measures are likewise impacting on international cooperation. Around 47% of the companies said that cooperation with foreign business partners had become more difficult over the past three years (see chart).

Focus on supply chain stability Swiss companies are again starting to prioritize supply chain stability and make the required changes. In addition to an increase in inventories (51% of respondents), they are also seeking to boost their resilience by focusing on providers of inputs that are closer to home (48%) and on diversifying their suppliers (43%). Nearly one in three companies has repatriated activities to Switzerland over the last three years. The survey results indicate an overall trend toward regionalization.

The crises of recent years, associated changes along supply chains, as well as anti-competitive measures are not only weighing on global trade but also leading to rising prices. The survey results show that more than 80% of the companies surveyed have seen an increase in transportation and energy costs as well as commodity prices over the past three years. Sooner or later, this broad-based rise in prices will not be sustainable for the companies concerned. Unsurprisingly, almost 90% of companies are doing something about it. More than half of the companies surveyed have responded by passing on higher costs to customers. The search for cheaper substitutes (35%) and productivity increases (26%) were also cited by many respondents. By contrast, only around 7% of the companies surveyed said they had considered shrinkflation – selling a smaller amount of product for the same price as before – in a bid to offset rising input prices.

Preserving a good reputation Reputational risks are likewise increasing amid the harsh geopolitical environment. According to the survey, almost one in five companies believes there is a strong or very strong likelihood of public criticism due to their own misconduct or misconduct by a business partner. This situation is forcing companies to spend more time and money on monitoring and preventing potential reputational risks. Fact is, a firm that fails to conduct due diligence can expect criticism or even a boycott of their products and services. The survey shows that 19% of companies consider this scenario to be likely. However, there is also a risk of reputational damage if sensitive information – due to a cyber-attack, for example – is made public. Nearly a third of companies see this as at least a fairly high risk. Against this backdrop, it is hardly surprising that around 83% of the companies surveyed are taking measures to combat increased reputational risks. The most common approaches are measures to prevent cyber-attacks (41%) as well as changes to products and services to meet the needs of stakeholders (38%).

Turbulent times call for flexibility Given the rapid succession of crises, the focus is on how Swiss companies can adapt and react to unforeseen events. As the survey shows, around 40% of companies see themselves in a good or very good position in this regard – with only 22% disagreeing. When asked about the obstacles to a possible reorientation of business activities, around 70% of companies reported financial resources or a lack of alternatives; meanwhile, 61% cited the lack of support from government. At the same time, however, almost half of the companies surveyed are convinced that they can rely on government support in the event of a crisis (see chart).

Crises always present opportunities, provided a sufficiently flexible approach is taken. Almost 60% of the companies said that new business areas had emerged despite the crises of the last three years (see chart). Swiss companies even see the positive side of the current energy crisis: More than half believe it represents an opportunity for them to become more sustainable (see chart).

The 2023 Credit Suisse SME study on how geopolitical tensions are creating challenges for Swiss firms can be found here (not available in English). For further information, visit www.credit-suisse.com/smestudy .

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The Volatility of Geopolitical Risk

• By Yasemin Zeisl
• Jan 28, 2020

Globalization has drawn geopolitical risk increasingly into the spotlight, connecting international politics with global markets. While political risk can refer to domestic policymaking, national corporate laws, and investment regulations, geopolitical risk largely affects markets and assets across borders. Symptoms of hostile tensions between two states, such as missile launches, drone attacks, or airstrikes, can send market prices soaring and create a panic. Following the killing of Major General Qasem Soleimani in a targeted US drone strike in Baghdad on January 3, 2020, social media users and tabloids spoke only half-jokingly of a forthcoming Third World War. Another event that caused a significant market panic was the drone attack on Saudi Arabia’s state-owned Aramco oil facilities in September 2019, which resulted in a dramatic single-day increase in oil prices. In that instance, however, prices recovered relatively rapidly, leaving businesses and risk managers uncertain about the true magnitude of the impact that geopolitical incidents have on markets.

In order to understand the relevance of geopolitical risk, we must understand the nature of geopolitical events and differentiate between long-term and short-term risks. Geopolitical events like a surprise drone attack are difficult to anticipate and can have a much higher or lower impact than expected, which is why making precise predictions is challenging. Markets can be quick to overreact before they restabilize, as pinning down the long-term implications immediately after these events can prove difficult. As soon as political developments become more predictable, however, markets adjust and become less volatile. For instance, US President Donald Trump’s political statements on his Twitter account may cause political uncertainty, yet their frequency has taught markets to react cautiously to unexpected announcements.

It is important to note that sudden explosions of geopolitical tension sometimes result in ongoing or even escalating mutual retaliation. When this occurs, businesses and markets can be put under stress for more extended stretches of time. Trade wars are prime examples of long-lasting geopolitical bouts. While the effects of trade wars are largely financial and economic, their root causes are commonly political, with international power plays or historical conflicts acting as catalysts for trade wars. As the US-China trade war and the Japan-South Korea trade dispute have demonstrated, international trade can be powerful leverage against one’s political opponent.

While bursts of geopolitical conflict, such as drone strikes, may create more immediate uncertainty, it is important to examine the potential effects of a medium to long-term escalation. A country’s foreign policy objectives, international alliances, and the personal motivations of its political leaders, among other factors, can indicate what is at stake and how businesses assess the relevance of various risks. Such factors vary from case to case, making geopolitical risk volatile and ever-progressing. Geopolitical risk levels can shift as new governments are formed, creating initial uncertainties and new opportunities alike. Continuously monitoring international relations and profiling heads of state, government administrations, and critical stakeholders are therefore vital.

Returning to the question of how much geopolitics matters we can conclude that the impact of geopolitical risk may be difficult to grasp. We cannot necessarily foresee sudden airstrikes, but we may acquire a better understanding of risk levels through a holistic approach that reflects on past events and evaluates what is at stake for political leaders in terms of personal, political, economic, and military affairs.

About the Author

Yasemin Zeisl

Yasemin Zeisl earned her MSc in International Relations and Affairs from the London School of Economics and Political Science (LSE). Yasemin is fluent in German and English and possesses advanced Japanese language skills.

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Open Access

Peer-reviewed

Research Article

The time-varying effects of geopolitical risk on mutual fund risk taking

Roles Conceptualization, Methodology, Writing – original draft, Writing – review & editing

Affiliation College of Economics and Management, Fujian Agriculture and Forestry University, Fuzhou, China

Roles Data curation, Methodology, Writing – original draft, Writing – review & editing

Roles Methodology, Writing – original draft, Writing – review & editing

* E-mail: [email protected]

Affiliation School of International Economics, China Foreign Affairs University, Beijing, China

Roles Writing – original draft, Writing – review & editing

Roles Data curation, Writing – review & editing

• Jie Liu, 
• Zhenshan Chen, 
• Yinglun Zhu, 
• Yangfa Chen, 
• Yaoye Huang

• Published: June 17, 2024
• https://doi.org/10.1371/journal.pone.0303766
• Reader Comments

Based on a time-varying parameter vector autoregression model with stochastic volatility (TVP-VAR-SV), this paper investigates the dynamic effects of geopolitical risk on mutual fund risk taking in China across three-time horizons and at three selected time points. Overall, the impulse responses are time-varying and we find a negative effect of geopolitical risk on mutual fund risk taking until 2015, with the short-term effect being the most pronounced, suggesting that when professional investors such as mutual fund managers are faced with the stock valuation uncertainty due to a geopolitical shock, they choose to reduce market risk exposures. After 2015, the short-term effect begins to diminish and gradually turns positive, which could be explained by the fact that with the increasing abundance and diversification of investment instruments, fund managers have more effective investment tools and more sophisticated trading strategies to hedge against geopolitical risk, rather than reducing market risk exposure. Further, we explore the heterogeneous effects of eight types of geopolitical risk and three types of mutual fund. The results indicate that the effect of geopolitical actions is stronger than that of geopolitical threats, while the effect of narrow geopolitical risk is stronger than that of broad geopolitical risk. Moreover, we find that the response of the risk taking of growth funds to the geopolitical risk is weaker than that of balanced and income funds.

Citation: Liu J, Chen Z, Zhu Y, Chen Y, Huang Y (2024) The time-varying effects of geopolitical risk on mutual fund risk taking. PLoS ONE 19(6): e0303766. https://doi.org/10.1371/journal.pone.0303766

Editor: Ata Assaf, University of Balamand, LEBANON

Received: September 10, 2023; Accepted: April 26, 2024; Published: June 17, 2024

Copyright: © 2024 Liu et al. This is an open access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Data Availability: The mutual fund trading data used in this study is owned by the CSMAR database, accessible at https://data.csmar.com/ . The authors gained access to this data through their institutional memberships, with no exclusive privileges that others would not have. The data provided by the CSMAR database include the stock market return, the return and the type of mutual fund. Due to restrictions on intellectual property in the CSMAR database which claims that "You shall not offer, disseminate, sell, rent, lend, transfer, share, display, copy, or sublicense the product, data modules, and contents (including those processed on the basis of company data) to a third party, or make available to others in other forms.", we are unable to share the data. However, anyone can obtain the mutual fund trading data used in this paper by subscribing to CSMAR's services and calculating the fund risk taking measure using the methods described in this paper. Anyone can contact the CSMAR database by email: [email protected] . Additionally, data regarding the geopolitical risk index can be freely obtained from https://www.matteoiacoviello.com/gpr.htm .

Funding: This research was supported by the National Natural Science Foundation of China (No. 71903030), the Natural Science Foundation of Fujian Province (No. 2020J01562), the China Foreign Affairs University's special research project (3162023XSX03), and Funds for Distinguished Young Scientists of Fujian Agriculture and Forestry University (No. XJQ2020S3).The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

Competing interests: The authors have declared that no competing interests exist.

1. Introduction

Frequent geopolitical risk events, such as the 9/11 terrorist attacks, the Iraq war, the Diaoyu Islands conflict between China and Japan, the Paris terror attacks, the North Korean nuclear crisis and the Russia-Ukraine war, have exacerbated global economic uncertainty and have had a profound impact on financial markets. For instance, in the aftermath of the 9/11 terrorist attacks in 2001, we witness a 5.2% drop in the Standard & Poor’s 500 index during the week that followed [ 1 ]. Geopolitical risks have raised concerns and attention among regulators and investors. The Bank of England acknowledges that macro-uncertainty shocks, including geopolitical risk and economic policy uncertainty, are expected to create Economic Post-Traumatic Stress Disorder, characterized by heightened caution among households, firms, and financial markets, stemming from the anticipation of future risks and generating a heightened sensitivity to downside tail risks [ 2 ]. A survey by Morgan Stanley also suggests that US fund managers will reduce their risk exposures in the face of the increasingly geopolitical risk (Please check https://longportapp.com/en/news/88823085 for more details). With the growing prominence of mutual funds in China’s wealth management industry [ 3 ], it has become increasingly crucial to examine the behavior of mutual funds in response to geopolitical risk shocks. Understanding the timeframe and extent to which mutual funds adjust their risk-taking strategies is essential for investors to accurately evaluate the expected returns and risks associated with their investment portfolios to optimize investment decisions, and has significant policy implications for regulators seeking to mitigate excessive market volatility stemming from geopolitical risks and maintain stability in financial markets.

While we acknowledge that previous literature has extensively examined the various aspects of the impact of geopolitical risk on the macroeconomic, asset pricing, and corporate finance [ 4 – 16 ], our research focuses on the effect of geopolitical risk on mutual fund risk taking, which has not been specifically studied. Furthermore, most of the existing literature investigate the cross-sectional determinants of mutual fund risk taking from a micro perspective [ 17 – 22 ]. However, there is a dearth of literature that examines the time-series variation in mutual fund risk taking from a macro perspective. In particular, to the best of our knowledge, there is no literature that focuses on the time-varying impact of geopolitical risk on mutual fund risk taking.

Geopolitical risk, encompassing wars, acts of terrorism, and political tensions between nations, is widely recognized as a macro-level exogenous systemic risk [ 8 ]. The inherent nature of geopolitical risk makes it difficult for investors to effectively mitigate its impact through traditional diversification strategies [ 1 ]. The literature suggests that risk-averse or ambiguity-averse investors, including fund managers, may reduce their risk taking when faced with increased uncertainty [ 23 – 25 ]. Moreover, [ 26 ] further highlight that mutual funds lack efficient investment vehicles compared to hedge funds, and typically lack significant market timing capabilities. Consequently, mutual funds are more inclined to shield themselves against the impact of geopolitical risk and curtail the potential loss of fund returns by lowering their market risk exposure. Based on a TVP-VAR-SV model, this paper investigates the time-varying impact of geopolitical risk on mutual fund risk taking, uncovering its dynamic and nonlinear nature. Additionally, we specifically focus on the time-varying response of mutual fund risk taking after significant geopolitical events, such as the Iraq war, the Diaoyu Islands dispute between China and Japan, and the Russia-Ukraine war. Furthermore, our analysis explores the heterogeneous effects of various types of geopolitical risk on different types of mutual funds.

Our study makes valuable contributions to the literature in the following four respects. First, albeit there have been extensive discussions on the influencing factors of mutual fund risk taking [ 3 , 17 – 22 ], the literature primarily focus on the micro perspective, such as the education and experience of fund managers, lacking an in-depth understanding of whether and how macro factors can impact mutual fund risk taking. Our study complements the literature by providing original evidence on how geopolitical risks act as an external shock and impact the market risk exposure of mutual fund.

Additionally, we contribute to the growing literature on the economic consequences of geopolitical risk [ 4 – 16 , 27 – 30 ], by providing original evidence that the fund risk taking is significantly correlated with geopolitical risk. To the best of our knowledge, this paper is the first specific research exploring the impact of geopolitical risk on funds’ investment styles, particularly risk taking tendencies.

Moreover, our study distinguishes itself from all of the prior research, which employ linear regressions to examine factors that affect fund risk taking [ 3 ], with the implicit assumption that the relationship is time-invariant. We instead expand upon the notion that the geopolitical risk has a time-varying and non-linear effect, which has two possible explanations. On the one hand, the geopolitical risk itself has significant time-series variation, with peaks around major geopolitical events such as the 9/11 terrorist attacks and the Iraq war [ 8 ]. On the other hand, the impact of geopolitical risk varies over time. For instance, with the occurrence of geopolitical conflict events in recent years, such as the Paris attacks, the US-North Korea nuclear crisis, the US-Iran tensions, and the Russia-Ukraine war, fund managers have not only gained more effective methods of hedging risk, but have also benefited from the availability of diverse investment tools, allowing them to implement more sophisticated strategies in mitigating the impact of geopolitical risk, rather than simply reducing market risk exposure. Therefore, we effectively take into account the time-varying effects of geopolitical risk based on a TVP-VAR-SV model proposed by [ 31 ].

Further, we examine the heterogeneity of the impact of different types of geopolitical risk, aligning with the existing literature that highlights significant differences between geopolitical threats and geopolitical actions [ 1 , 32 ]. Overall, our findings not only contribute to a deeper understanding of the effects of geopolitical risk, but also have valuable implications for policy makers, fund investors, and fund managers. For policymakers, it is imperative to recognize the potential for portfolio reallocations of mutual funds and market volatility triggered by geopolitical events. A proactive approach of price stabilization and liquidity support is essential to mitigate the contagious effects of financial risks stemming from geopolitical uncertainties. For fund investors, understanding the nuanced responses of mutual funds to geopolitical risks is crucial in making informed asset allocation decisions. Investors must align their asset allocations with their risk appetites and leverage empirical insights on fund risk-taking behaviors to assess expected returns and risks accurately. For fund managers, the availability of sophisticated investment instruments offers new opportunities to hedge against geopolitical risks. Fund managers must embrace financial innovation, fully utilize these instruments, and master corresponding trading techniques to navigate the increasingly complex market environment caused by geopolitical risks.

The rest of the paper is structured as follows: Section 2 reviews the relevant literature. Section 3 introduces the model and the data used in our analysis. Section 4 presents the empirical results of the TVP-VAR-SV model, and section 5 concludes.

2. Literature review

Our study establishes a relationship between geopolitical risk and mutual fund risk taking and is therefore relevant to both parts of the literature. Geopolitical risk refers to the risks associated with wars, terrorist attacks and interstate tensions that disrupt the normal course of international relations [ 8 ]. The economic consequences of geopolitical risks have been extensively explored in the literature [ 4 – 16 ]. From a macroeconomic perspective, [ 8 ] find that geopolitical risks lead to a contraction in economic activity, which is reflected in lower investment and employment. At the same time, peaks in geopolitical risk are associated with a higher probability of recession, downside risks to GDP and lower expected GDP growth. Moreover, the literature finds that perceptions of geopolitical risk discourage foreign direct investment, while effective governance lessens the impact of geopolitical risk by decreasing policy uncertainty [ 6 ].

From an asset pricing perspective, elevated geopolitical risk dampens stock market liquidity [ 9 ], devalues exchange rates [ 10 ], lowers stock return and bond yields, increases stock market volatility [ 11 , 13 ], and suppresses investor sentiment [ 16 ]. Major financial assets, such as stocks, bonds, and commodities, have been exposed notably to geopolitical risk. Numerous studies have primarily focused on the impact of geopolitical risk on stock pricing. For example, [ 8 , 30 ] find that during periods of high geopolitical risk, industries with higher sensitivity to geopolitical risk experience a significant downward pressure in stock returns. Similarly, [ 13 ] indicate a significantly negative impact of global geopolitical risk on stock prices in the Chinese rare metals sector after 2012. Regarding the cause of this effect, [ 29 ] demonstrate that geopolitical risk reduces household stock market investment primarily due to differences in investors’ risk preferences, rather than the sensitivity to geopolitical risk in specific industries. However, contrary to the findings of [ 8 , 11 , 13 , 33 ] argue that global geopolitical risk significantly impact stock return volatility in emerging market rather than returns. On the other hand, [ 34 ] focusing on six Gulf Cooperation Council (GCC) countries, find that global geopolitical risk loses predictive power for stock prices when risk-adjusted returns are considered. These studies collectively indicate that geopolitical risk may have heterogeneous effects on stock price performance in different countries and at different times.

As for the impact of geopolitical risk on the bond market, the literature finds a long-term negative correlation between U.S. Treasury bond yields and global geopolitical risk [ 27 ]. Additionally, [ 1 ] suggest that only exceptionally high levels of geopolitical risk affect bond yields, as it takes prominent news coverage to capture investor attention and alter their investment behavior. [ 33 ] also indicate that geopolitical risk impacts both the yield and volatility of the Islamic bond market.

As for the impact of geopolitical risk on the commodity market, [ 8 , 28 , 34 ] establish that the geopolitical risk demonstrates a robust predictive capability for crude oil volatility, particularly within the Gulf Cooperation Council (GCC) countries. In the context of the Chinese market, the geopolitical risk exerts varying short-term effects on a range of commodities, including composite commodities, energy commodities, agricultural commodities, industrial metals, and precious metals [ 13 ]. Moreover, the extent to which different types of commodities are affected by geopolitical shocks varies significantly. The empirical evidence provided by [ 15 ] indicate that geopolitical risk exerts the most substantial influence on the price volatility of copper and crude oil, as these commodities are highly reliant on external factors. [ 35 ] demonstrate that during the Russia-Ukraine war, some commodities including silver, gold, copper, platinum, aluminum, and sugar, act as net transmitters of volatility, while wheat, oats, and lead exhibit a more pronounced net receiving effect.

From a corporate finance perspective, the literature suggests that geopolitical risk increases uncertainty in the business environment and external financing [ 4 ], affects corporate dividend payout policies by raising firms’ cash flow uncertainty and the risk of financial distress [ 5 ], reduces foreign direct investment [ 6 ], decreases merger and acquisition (M&A) transactions [ 7 ], and inhibits corporate investment [ 8 ]. Further, the effect of political connection on a company’s exposure to geopolitical risk remains a topic of debate. [ 4 ] establish that politically connected firms can mitigate the adverse impact of geopolitical risk on corporate investment, while [ 5 , 36 ] suggest that the effects of geopolitical risk are mainly present in firms whose operations are involved in geopolitical events. While acknowledging that the literature has extensively examined the economic consequences of geopolitical risk, there is a research gap about the impact of geopolitical risk on the investment decision of mutual fund, particularly the risk taking of mutual fund.

In recent years, mutual funds have gained significant prominence in China’s asset management industry, as a growing number of investors have increased their allocation to mutual funds within their portfolios [ 3 ]. In order to better understand the risk exposure associated with investing in mutual funds, it is crucial to investigate the factors that drive fund managers’ risk taking behavior. Existing research predominantly focuses on analyzing mutual fund risk taking at the micro level. This line of literature explores various personal characteristics of fund managers and argues that those who have attended prestigious universities, possess higher levels of education, and have more experience tend to exhibit a greater willingness to take on higher levels of risk [ 17 , 19 ]. In contrast, [ 20 ] find that fund managers from prestigious institutions, highly educated and experienced in the field prefer lower risk taking. However, [ 18 ] note that the level of education or the quality of education is not significantly related to the market risk taken by funds. Instead, they find that fund managers with longer tenure are more inclined to take less systemic risk. In addition to personal characteristics, the literature has also explored the determinants of fund managers’ risk taking behavior from the perspectives of unemployment risks and pay incentives. For example, [ 21 ] investigate how the combination of unemployment risks and pay incentives impacts fund managers’ risk taking. Further, [ 22 ] find that fund manager ownership can serve as an incentive adjustment mechanism to mitigate excessive risk taking triggered by agency problems.

Compared to the majority of literature that explores the factors influencing fund managers’ risk taking at the micro level, there is a scarcity of research that examines macro-level factors [ 3 ]. We fill the research gap by investigating the time-varying impact of geopolitical risk on mutual fund risk taking through a TVP-VAR-SV model.

3. Methodology and data

3.1 tvp-var model with stochastic volatility.

Following [ 37 ], let ɑ t = ( ɑ 21 , ɑ 31 , ɑ 32 , ɑ 41 , …, ɑ k , k-1 )′ be a stacked vector of the low-triangular elements in A t and h t = ( h 1t , …, h kt )′ with h jt = log σ 2 jt , for j = 1, …, k , t = s +1, …, n . Assuming the parameters in Eq ( 6 ) to follow a random walk process, i.e. β t +1 = β t + μ βt , ɑ t +1 = ɑ t + μ ɑt , and h t +1 = h t + μ ht , the normal distribution is derived as shown in Eq ( 7 ).

Where β s +1 ∼ N ( μ β 0 , ∑ β 0 ), ɑ s +1 ∼ N ( μ ɑ 0 , ∑ ɑ 0 ) and h s +1 ∼ N ( μ h 0 , ∑ h 0 ).

Following [ 31 ], we employ the Bayesian approach with the MCMC algorithm to obtain an accurate and efficient estimation of the TVP-VAR-SV model, since the model is a nonlinear model, and estimating the maximum likelihood function requires extensive computational effort and multiple iterations of filtering. The equal-interval and the time-point impulse response functions are our two primary tools for interpreting the model. Specifically, the equal-interval impulse response measures the dynamic time-varying effect of a unit shock in geopolitical risk in each month on mutual fund risk taking, while the time-point impulse response reflects the dynamic relationship between geopolitical risk and mutual fund risk taking at each point in time.

3.2 Data source and variable specification

To examine the time-varying relationship between geopolitical risk and mutual fund risk taking, we begin by merging two databases: (i) the Geopolitical Risk Index Webpage ( https://www.matteoiacoviello.com/gpr.htm ), which provides monthly geopolitical risk indexes; (ii) the CSMAR database ( https://data.csmar.com/ ), which contains financial and accounting data on mutual funds. The monthly data used in our study cover the period from January 2000 to January 2023.

3.2.1 Risk taking measure in the mutual fund industry.

Further, we employ the fund classification data from the CSMAR database, which categorizes actively managed equity mutual funds into growth funds, balanced funds, and income funds based on their self-declared investment objectives and strategies following [ 45 ]. Specifically, growth funds primarily seek capital appreciation by investing in growth-oriented stocks. Balanced funds seek a mix of capital appreciation and income by investing in both growth and income stocks. Income funds focus primarily on generating regular income by investing in dividend-paying stocks. Based on the categorization, we measure the risk taking of the three types of funds using their average market beta, i.e. GrowthBeta , BalanceBeta , and IncomeBeta .

3.2.2 Measure of geopolitical risk.

The main independent variable is the Geopolitical Risk Index ( GPR ) developed by [ 8 ], which is constructed monthly on the basis of an aggregation of newspaper articles on geopolitical tensions published in 11 leading international newspapers. [ 8 ] undertake diverse validation procedures for the index to substantiate the index’s efficiency, comprising a formal audit of 7,000 newspaper articles, correlations with significant historical events linked to warfare, terrorism, or global emergencies, and comparisons with subjective views on geopolitical risk.

There are three justifications for utilizing the global measure of geopolitical risk ( GPR ) developed by [ 8 ] to gauge geopolitical risk and explore its impact on the risk taking of mutual funds in China. First of all, in the context of economic globalization, it is noteworthy that China is the world’s second-largest economy and has substantial links with the global economy [ 15 ]. The Chinese financial market is therefore affected by shocks stemming from both domestic geopolitical risk and global geopolitical risk, such as 9/11 terrorist attack and the Russia-Ukraine war, which have a significant impact on the Chinese financial market [ 13 ]. Compared to a China-specific measure of geopolitical risk, the global measure offers a more comprehensive analysis, encompassing global geopolitical risk information, including that relevant to China. Therefore, with respect to research conducted within the context of the Chinese market, the global measure of geopolitical risk is widely adopted [ 13 , 15 ]. Furthermore, one significant advantage of the Geopolitical Risk Index is its low correlation with other uncertainty indices, such as EPU (the Economic Policy Uncertainty Index). The correlation between these two measures is only 0.2 [ 29 ], aiding us in separating the impact of geopolitical risk from other types of uncertainty that may endogenously influence the mutual fund risk taking. Moreover, the index has the capacity to capture a diverse blend of terrorist acts, political conflicts and wars, which goes beyond the narrow focus on events solely relating to war or terrorism. Therefore, using the index not only enables us to exceed the constraints of distinct event-based measurement methods but also widens the range of our analysis. Additionally, the detailed subcategories of the global GPR index allow us to undertake a thorough investigation into how various origins of geopolitical risk affect the conduct of mutual fund risk taking.

Additionally, we employ the Historical Geopolitical Risk Index ( GPRH ) developed by [ 8 ] as an alternative indicator. GPR and GPRH exhibit consistent patterns with disparities in two aspects: time scales and data sources. GPR encompasses data starting from 1985 and is extracted from prominent news sources such as Boston Globe, Chicago Tribune, Daily Telegraph, Financial Times, Globe and Post, Guardian New York Times, Los Angeles Times, New York Times, Times, Wall Street Journal, and Washington Post. However, GPRH entails data spanning back to 1900, and the data is sourced from New York Times, Chicago Tribune, and Washington Post. Fig 1 illustrates the variation of the geopolitical risk index ( GPR ) and historical geopolitical risk ( GPRH ) from January 2000 to January 2023. The underlying patterns of GPR and GPRH are consistent, with three distinct peaks observed in 2001, 2003 and 2022. These peaks correspond to significant geopolitical events: the 9–11 terrorist attacks in September 2001, the Iraq war in March 2003, and the Russia-Ukraine war in February 2022. Furthermore, in order to investigate the heterogeneous effects of classified geopolitical risks on the primary data sources. The geopolitical risk index is classified into GPT , GPA , GPB and GPN . Specifically, GPT and GPA capture the geopolitical threats and the geopolitical acts, respectively, while GPB and GPN capture the geopolitical tensions in the broad and narrow ranges respectively. Similarly, the historical geopolitical risk index is classified into GPHA , GPHT , GPHB , and GPHN . Moreover, following [ 8 , 14 ], we logarithmically transform all variables to achieve data stationarity and alleviate heteroscedasticity.

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https://doi.org/10.1371/journal.pone.0303766.g001

4. Empirical results

4.1 unit root tests.

Before proceeding to the estimation of a TVP-VAR-SV model, we employ Augmented Dickey-Fuller (ADF) tests and Phillips and Perron (PP) tests to examine the stationarity of the variables after logarithmic transformation. The results are presented in Table 1 , which indicates that all the variables are stationary in terms of their log levels at the 1% significance level for both ADF and PP tests. Therefore, it makes sense to use the log level form in the model.

https://doi.org/10.1371/journal.pone.0303766.t001

4.2 Estimation of selected parameters

To investigate the impact of geopolitical risk on mutual fund risk taking, following [ 46 , 47 ], Markov chain Monte Carlo (MCMC) method based on Bayesian framework is adopted to estimate the TVP-VAR-SV model. The estimation results for selected parameters in the TVP-VAR-SV model are presented in Table 2 , in which Panels A, B, C, D, E, F, G, and H show the estimation results for the set ( GPR , GPRH , TotalBeta ), ( GPT , GPHT , TotalBeta ), ( GPA , GPHA , TotalBeta ), ( GPB , GPHB , TotalBeta ), ( GPN , GPHN , TotalBeta ), ( GPR , GPRH , GrowthBeta ), ( GPR , GPRH , BalanceBeta ) and ( GPR , GPRH , IncomeBeta ), respectively. The findings demonstrates that all of the estimated posterior means are included in the 95% confidence intervals and the standard deviations are small relative to the mean values. Moreover, the Geweke’s diagnostic statistics suggest that all of the parameters cannot reject the null hypothesis at the 5% significance level, indicating that the parameters converge to the posterior distribution. As a result, convergence of the time-varying parameters is successfully achieved, as demonstrated by the diagnostic tests. Further, we observe that the majority of inefficiency factors are below 100 in our study, which are comparable to those reported in [ 13 , 14 , 31 ]. The largest inefficiency factors are 110.85, which indicates that we get approximately 10000/110.85 ≈ 90 unrelated samples and is enough for effective posterior estimation. Overall, we can safely conclude that the use of MCMC algorithm can effectively estimate the parameters in our TVP-VAR-SV model.

https://doi.org/10.1371/journal.pone.0303766.t002

4.3 Time-varying effects of geopolitics risk on the risk taking of mutual funds

4.3.1 time-varying effects at different time horizons..

We employ the time-varying impulse response function to investigate the dynamic effect of geopolitical risk on mutual fund risk taking, which is measured by the average market beta of actively managed mutual funds. Specifically, we set the time varying impulse response with the cumulated three-dimensional representation, which are 1 period (one month), 6 periods (six months) and 12 periods (one year), representing short-term, medium-term and long-term, respectively. To make the impulse responses on each variable comparable over time, following [ 14 ], the amplitude of the shock is set to the time-series average of the stochastic volatility over the sample period. The results presented in Fig 2 indicate that the responses of geopolitical risk differ significantly over time and the magnitude of the responses varies over different time horizons, justifying the use of the TVP-VAR-SV model.

https://doi.org/10.1371/journal.pone.0303766.g002

The responses of mutual fund risk taking ( TotalBeta ) to geopolitical shocks ( GPR ) are found to be significantly negative as expected, indicating that when professional investors such as mutual fund managers are faced with the stock valuation uncertainty due to a geopolitical risk shock, they tend to reduce the market risk loading. Our findings are consistent with the previous literature which claims that unlike their hedge fund counterparts, mutual funds equip less effective investment tools to hedge against macroeconomic uncertainty [ 26 ]. Notably, [ 48 , 49 ] point out that geopolitical risks have a significant negative impact on stock prices, which may trigger investors to sell risky assets in search of safer ones until their perception of a stable future is restored [ 50 ]. Therefore, in order to hedge against geopolitical risk and prevent geopolitical uncertainty from affecting fund performance, fund managers may choose to hold stocks with lower market risk. In addition, the comparative results across different time horizons indicate that for most of the time in the sample, geopolitical shocks exert the greatest impact on mutual fund risk taking over the next one month and the impact fades over the next six and twelve months, most of which disappears within twelve months. These findings indicate that, overall, the influence of GPR on TotalBeta concentrates in the short term, which can be explained by the fact that the majority of the effect of geopolitical risks on financial markets is limited to the short term [ 30 , 33 ]. In the face of unexpected circumstances, the fund adopts short-term measures to mitigate its market risk exposure, gradually resuming normal risk taking after the event has been settled [ 51 , 52 ]. Additionally, considering a behavioral finance perspective, geopolitical events only have a temporary influence on investor sentiment and the market panic will unwind gradually [ 16 ]. Consequently, following an external geopolitical shock, fund managers tend to react immediately by reducing risk taking to mitigate stress.

Further, the impact of geopolitical shock on mutual fund risk taking is found to be particularly negative in the period from 2012 to 2013, which could be attributed to the ongoing dispute between China and Japan over the Diaoyu Islands and oil exploration rights in the East China Sea. Another typical period in which the risk taking of mutual funds responses significantly to geopolitical risks covering the period from 2003 to 2004, which seem to be associated with Iraq war. However, the response of mutual fund risk taking to geopolitical risk began to weaken after 2014. One possible explanation is that with the increasing abundance and diversification of investment instruments in financial markets, fund managers have more effective investment tools and more sophisticated trading strategies to hedge against geopolitical risk, instead of reducing market risk exposure. Moreover, the time-varying pattern of the response of mutual fund risk taking to GPRH is basically consistent with the response to GPR , while the response to GPRH becomes positive between 2015 and 2018 and alternates between positive and negative after 2018.

4.3.2 Time-varying effects at different time points.

Since the impulse responses of mutual fund risk taking are time-varying, we select three time points to further examine the effects of GPR and GPRH on the dynamics of TotalBeta , which are March 2003, September 2012 and February 2022, corresponding to the Iraq war, the China-Japan Diaoyu Islands dispute and the Russia-Ukraine war, respectively. As shown in Fig 3 , the negative impact of geopolitical shock reaches its maximum within the fourth month after the geopolitical event, while the magnitude of the responses depends on selected time points. Of the three geopolitical conflicts, the negative response of mutual fund risk taking to the China-Japan Diaoyu Islands dispute is dramatic and persistent. Our findings highlight that when confronted with increasing geopolitical risks related to their home country, fund managers opt for stocks with lower market risk exposure in order to safeguard fund performance from external uncertainties, which is in line with [ 13 , 53 ], suggesting that investors tend to be more responsive to signals from their home country than to international signals. Additionally, we observed a modest but positive response in mutual fund risk taking to the geopolitical risks arising from the Russian-Ukrainian war in 2022, indicating that fund managers might identify investment opportunities amid heightened geopolitical risks and are willing to assume slightly higher risks in pursuit of potential returns. In summary, fund managers adapt their investment strategies flexibly to strike a balance between risk mitigation and capitalizing on opportunities, ultimately aiming to maximize fund performance.

https://doi.org/10.1371/journal.pone.0303766.g003

4.4 The heterogeneous effects of classified geopolitics risk on the risk taking of mutual fund

4.4.1 time-varying effects at different time horizons..

To investigate the heterogeneous effects of classified geopolitics risks on the risk taking of mutual fund, the geopolitical risk index ( GPR ) is classified into GPA , GPT , GPB , and GPN , while the historical geopolitical risk index ( GPRH ) is classified into GPHA , GPHT , GPHB , and GPHN . As Fig 4 shows, the risk taking of mutual fund responds negatively to most types of geopolitical shocks, but the negative effects taper off after 2014, consistent with the pattern of impulse responses to GPR or GPRH .

https://doi.org/10.1371/journal.pone.0303766.g004

The risk taking of mutual fund responds more negatively to GPHA than it does to GPA , GPT and GPHT for most of the time, especially during the period from 2002 to 2007, suggesting that the uncertainty generated by geopolitical actions is significantly stronger than that generated by geopolitical threats, forcing fund managers to reduce their market risk exposure more. This phenomenon aligns with the economic rationale that geopolitical actions are more probable to impact financial markets than geopolitical threats [ 8 ]. Consequently, geopolitical actions prompt a more significant reaction from mutual funds. Notably, the response to GPT turns positive after 2019 and the response to GPHT turns positive after 2015, suggesting that mutual fund managers are willing to expose themselves to higher market risk in the presence of geopolitical threats as investment vehicles become more abundant. Mutual fund risk taking responses weaker to GPB ( GPHB ) than to GPN ( GPHN ), which suggests that mutual funds are more concerned about narrow geopolitical risk than broad geopolitical risk. The responses to GPB , GPHB , GPN , and GPHN become less negative or more positive after 2014, suggesting that mutual fund managers are no longer hedging against geopolitical uncertainty by simply reducing their exposure to market risk.

4.4.2 Time-varying effects at different time points.

Fig 5 shows the response of TotalBeta to GPT , GPA , GPB , GPN , GPHT , GPHA , GPHB and GPHN at three selected time points. During the Iraq war, all eight categories of geopolitical risk have an immediate negative impact on TotalBeta , and the negative impact would have been maximized within two months. Of these eight categories of geopolitical risk, TotalBeta has the most negative response to GPHA and GPHN in the first month, by approximately 10%. Moreover, during the China-Japan Diaoyu Islands dispute, the response of TotalBeta to GPB is negative and declines over time, while the response to the other seven categories of geopolitical risk is negative, increases within two months and begins to decay after two months. In addition, TotalBeta has a more significant response to GPN ( GPHN ) than GPB ( GPHB ), suggesting that narrowly defined geopolitical risk is more in line with the mutual fund’s perception of risk. Further, during the Russia-Ukraine war, the responses of TotalBeta to different types of geopolitical risk are mixed. Specifically, responses to GPT , GPA , GPN , and GPHN are alternately positive and negative over time, responses to GPHT , GPHA , and GPB are positive and diminish after 5 months, and responses to GPHB are consistently negative. Our findings suggest that compared to earlier periods, during the Russia-Ukraine war, mutual funds are able to use the effective investment tools to hedge different types of geopolitical risks more accurately, as evidenced by significant differences in the impact of different types of geopolitical risks on the risk taking of funds.

https://doi.org/10.1371/journal.pone.0303766.g005

4.5 Time-varying effects of geopolitics risk on the risk taking of classified mutual fund

4.5.1 time-varying effects at different time horizons..

Following [ 45 ], we categorize actively managed mutual funds into growth funds, balanced funds and income funds, and examine the response of diversified fund to geopolitical risk. As shown in Fig 6 , prior to 2014, the responses to geopolitical risk shocks exhibit a consistent and significant negative trend, showcasing a higher magnitude in comparison to other time periods. However, following 2014, the negative responses gradually attenuate in magnitude, maintaining a weakening trend that has persisted to the present day. Even for most of the period after 2020, the responses of all three types of funds to GPR turn positive. In addition, the risk taking of growth funds is less responsive to geopolitical risk than balanced and income funds, which could be attributed to the fact that growth funds target companies with fast growth rates or high growth potential [ 45 ]. As suggested by [ 45 ], the high growth is often accompanied by the high risk. As a result, growth funds have a higher risk preference than the other two types of funds, which makes growth funds less sensitive to geopolitical risk.

https://doi.org/10.1371/journal.pone.0303766.g006

4.5.2 Time-varying effects at different time points.

We further examine the responses of the three types of mutual funds during three selected geopolitical events, i.e. the Iraq war in March 2003, the China-Japan Diaoyu Islands Dispute in September 2012, and the Russia-Ukraine war in February 2022. The results shown in Fig 7 indicate that during the Iraq war and the China-Japan Diaoyu Islands dispute, the short-term response of the risk taking to GPR and GPRH is negative for all three types of funds and gradually decays away over time. During the Russia-Ukraine war, the short-term response of the risk taking of growth funds and income funds to GPR is positive and gradually recede over time, while the short-term response of balanced funds is almost negligible, peaking within two months before gradually decreasing. On the other hand, the short-term response of growth funds and income funds to GPRH is initially negative, but it turns positive after five months. One possible explanation is that these funds raised their cash reserves and diminish risk taking at the outset of the Russian-Ukrainian war due to concerns that the geopolitical risks measured by GPRH could impair fund performance. However, following five months, when the fund managers perceived profitable investment prospects as a result of the war [ 54 ], they began augmenting their risk exposure to capitalize on potentially gains.

https://doi.org/10.1371/journal.pone.0303766.g007

5. Conclusions

Frequent geopolitical events have been determined to exert a substantial influence on financial markets [ 4 – 16 , 27 – 30 ]. As mutual funds constitute a growing portion of investors’ portfolios [ 3 ], their performance and risk exposure are becoming ever more crucial for investors. In this context, based on the TVP-VAR-SV model proposed by [ 31 ], this paper employs the geopolitical risk index constructed by [ 8 ] to investigate the impact of geopolitical risk on mutual fund risk taking, and to reveal the time-varying and non-linear nature of this relationship. Moreover, we delve into the evolution of mutual fund risk taking in response to specific geopolitical events, such as the Russia-Ukraine war. Additionally, we examine the heterogeneous effects of eight distinct types of geopolitical risks and three different types of mutual funds.

We find a significant negative response of mutual fund risk taking to geopolitical risk prior to 2015, with the short-term effect being the most pronounced. However, after 2015, the short-term effect begins to diminish and gradually turns positive, suggesting that with the increasing availability of investment instruments, mutual funds are more willing to hedge their exposure to geopolitical risk through means other than reducing their market risk exposure. Further, the impact of geopolitical actions is significantly stronger than that of geopolitical threats, prompting mutual funds to reduce their market exposure to a greater extent. Moreover, mutual funds are more concerned about narrow geopolitical risk than broad geopolitical risk. In addition, we find that the response of risk taking of growth funds to geopolitical risk is weaker than that of balanced and income funds, probably because growth funds have a higher risk preference, which makes growth funds less sensitive to geopolitical risk.

Our research makes significant contributions to the literature on mutual fund and geopolitical risk. Albeit there have been extensive discussions on the influencing factors of mutual fund risk taking [ 3 , 17 – 22 ], the literature primarily focus on the micro perspective, such as the education and experience of fund managers. Our study complements the literature by providing original evidence on how geopolitical risks act as a macro external shock and impact the market risk exposure of mutual fund, contributing to the growing literature on the economic consequences of geopolitical risk [ 4 – 16 ]. Moreover, our study distinguishes itself from all of the prior research [ 3 ], which employ linear regressions to examine factors that affect fund risk taking, with the implicit assumption that the relationship is time-invariant. We instead effectively take into account the time-varying and non-linear effects of geopolitical risk based on a TVP-VAR-SV model.

Our study not only fills the research gap by uncovering the time-varying impact of geopolitical risk on fund risk taking, but also provides valuable insights for policymakers, mutual fund investors and fund managers. For policymakers, recognizing the significant effect of global geopolitical risk in shaping short-term mutual fund risk taking is paramount. Geopolitical events can prompt substantial portfolio reallocations by mutual funds, potentially resulting in drastic fluctuations in asset valuations and episodes of insolvency in the market. Consequently, policymakers should consider implementing price stabilization and liquidity support systems to facilitate stable market trading and safeguard market liquidity. Considering the suddenness of geopolitical risks, the proactive approach is essential in guarding against excessive contagion of systemic financial risks that may arise from geopolitical events. For mutual fund investors, allocating assets to funds that correspond with the investor’s risk appetite is a pivotal component of investment decisions while understanding how mutual fund risk taking responds to geopolitical risk allows for a more accurate assessment of the expected return and risk of investing in a fund. Our empirical findings reveal variations in risk taking among growth, balanced, and income funds when responding to geopolitical risks, which can aid fund investors in making more suitable asset allocation decisions depending on the fund type during times of heightened geopolitical risk. For fund managers, the availability of a wider range of investment instruments that offer more options to effectively hedge against geopolitical risk, rather than just reducing exposure to market risk. Fund managers should adopt financial innovation, utilize new financial instruments to their full potential, and master corresponding trading techniques to navigate the increasingly intricate market environment. Furthermore, our findings indicate heterogeneous effects of different types of geopolitical risk. For instance, Chinese mutual funds show more sensitivity to geopolitical risk that involve their own country, such as the China-Japan Diaoyu Islands dispute in 2012, suggesting that regulators and investors should carefully manage different types of geopolitical risks to account for their specific characteristics.

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Oil settles higher on mounting tension in Europe, Mideast

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Wednesday, 19 Jun 2024

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Brent crude futures settled up US$1.08, or 1.3%, at US$85.33 per barrel. US West Texas Intermediate crude futures ended US$1.24, or 1.5%, higher at US$81.57 a barrel.

HOUSTON: Oil settled more than 1% higher on Tuesday due to escalating geopolitical risk in Europe and the Middle East, where wars continue to threaten global supply.

Brent crude futures settled up US$1.08, or 1.3%, at US$85.33 per barrel. US West Texas Intermediate crude futures ended US$1.24, or 1.5%, higher at US$81.57 a barrel.

Global benchmark Brent has clambered back from an early-June close of US$77.52, yet remains off its US$90 peaks from mid-April.

Prices rose after a Ukrainian drone strike caused a large fire in a fuel tank at an oil terminal in Russia's southern port of Azov, according to Russian officials and a Ukrainian intelligence source.

The port of Azov has two oil product terminals, which handled a total of about 220,000 tonnes of fuel for export during the period from January to May.

The ongoing attacks on Russia's oil refining complex pose a threat to physical global supply, as well as boosting the risk premium priced into crude futures.

"The Ukrainian attack reminds the market that Russian energy infrastructure is very much in the crosshairs, the global market needs those barrels of crude and refined products to keep prices in check,” said John Kilduff, partner at Again Capital.

Meanwhile, Israeli Foreign Minister Israel Katz warned that a decision on an all-out war with Hezbollah was coming soon even as the U.S. tries to avert a greater war between Israel and Lebanon's Hezbollah movement.

Special envoy Amos Hochstein to US President Joe Biden, said he had been dispatched to Lebanon immediately following a brief trip to Israel because the situation was "serious."

"Everywhere you look the geopolitical risk factor is very high," Price Futures Group's Phil Flynn said.

"We have not seen a major impact on supply but that could change really quickly," he added.

Prices also climbed after New York Federal Reserve President John Williams said interest rates will come down gradually but gave no precise timetable.

Later, oil came under pressure when Boston Federal Reserve President Susan Collins cautioned that it was "too soon to determine whether inflation is durably on a path back to the 2% target."

The market is also watching US stockpile data due this week for hints on the oil demand outlook during summer driving season.

US crude oil inventories posted a surprise build last week while gasoline stocks fell, market sources said, citing American Petroleum Institute figures.

The API figures showed crude stocks rose by 2.264 million barrels in the week ended June 14, the sources said on condition of anonymity, compared with an

expected draw of 2.2 million barrels. Gasoline inventories fell by 1.077 million barrels, and distillates rose by 538,000 barrels.

Official inventory data from the US Energy Information Administration will be released at 11:00 a.m. EDT on Thursday, delayed a day due to the Juneteenth holiday. — Reuters

Tags / Keywords: OilPrices , GeopoliticalRisk , BrentCrude , WTICrude , GlobalSupply , UkrainianConflict , MiddleEastTensions

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Oil settles over 1% higher on mounting tension in Europe, Mideast

Oil settled more than 1% higher on Tuesday due to escalating geopolitical risk in Europe and the Middle East, where wars continue to threaten global supply.

Brent crude futures LCOc1 settled up $1.08, or 1.3%, at $85.33 per barrel. US West Texas Intermediate crude futures CLc1 ended $1.24, or 1.5%, higher at $81.57 a barrel.

Global benchmark Brent has clambered back from an early-June close of $77.52, yet remains off its $90 peaks from mid-April.

Keep updated, follow The Business Standard's Google news channel

Prices rose after a Ukrainian drone strike caused a large fire in a fuel tank at an oil terminal in Russia's southern port of Azov, according to Russian officials and a Ukrainian intelligence source.

The port of Azov has two oil product terminals, which handled a total of about 220,000 tons of fuel for export during the period from January to May.

The ongoing attacks on Russia's oil refining complex pose a threat to physical global supply, as well as boosting the risk premium priced into crude futures.

"The Ukrainian attack reminds the market that Russian energy infrastructure is very much in the crosshairs, the global market needs those barrels of crude and refined products to keep prices in check," said John Kilduff, partner at Again Capital.

Meanwhile, Israeli Foreign Minister Israel Katz warned that a decision on an all-out war with Hezbollah was coming soon even as the US tries to avert a greater war between Israel and Lebanon's Hezbollah movement.

Special envoy Amos Hochstein to US President Joe Biden, said he had been dispatched to Lebanon immediately following a brief trip to Israel because the situation was "serious."

"Everywhere you look the geopolitical risk factor is very high," Price Futures Group's Phil Flynn said.

"We have not seen a major impact on supply but that could change really quickly," he added.

Prices also climbed after New York Federal Reserve President John Williams said interest rates will come down gradually but gave no precise timetable.

Later, oil came under pressure when Boston Federal Reserve President Susan Collins cautionedthat it was "too soon to determine whether inflation is durably on a path back to the 2% target."

The market is also watching US stockpile data due this week for hints on the oil demand outlook during summer driving season.

US crude oil inventories posted a surprise build last week while gasoline stocks fell, market sources said, citing American Petroleum Institute figures.

The API figures showed crude stocks rose by 2.264 million barrels in the week ended June 14, the sources said on condition of anonymity, compared with an expected draw of 2.2 million barrels. Gasoline inventories fell by 1.077 million barrels, and distillates rose by 538,000 barrels.

Official inventory data from the US Energy Information Administration will be released at 11:00am EDT on Thursday, delayed a day due to the Juneteenth holiday.

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