Geopolitics, markets and investment

Navigating risk and opportunity in an uncertain world

10 minute read time

In the last decade, geopolitical events have moved from external risks for the market to direct influencers on its parameters and behaviours. International politics are driving economic outcomes, including inflation, interest rates and capital flows. The energy markets are closely attuned to conflict and its resolution, while government policy towards both competitors and allies is shaping investment opportunities, supply chain resilience and trade routing.

The growing interconnection between global markets has given geopolitics a greater influence on investment outcomes. An environment where the market is at the mercy of geopolitical manoeuvring heightens investor risk, with an ever-present risk that a radical shift in the established order will swing the pendulum on their investments. But as global alliances dissolve and reform, it also opens up new opportunities.

“There’s a turbulence which will continue for the next decade, maybe more, with profound shifts in how geopolitics are conducted and what’s driving them,” says Scott Livingstone, International Advisor at NatWest Group. “There’s an incredible sense of uncertainty and volatility, and yet there’s resilience in the economic system and profitability in the investment space.”

How possible it is to exploit that profitability will depend on how fast the cycle of volatility turns, and if patterns are observable within the turbulence. With a wide enough perspective, consistent trends can be found. “Europe is predictable in broad terms,” believes Scott. “It’s going to encounter hostility from Russia for a couple of decades. It’s going to have unreliable friendship from America beyond the next electoral cycle. It’s going to be up against predatory Chinese manufacturing. It has a massive challenge being relevant in future technology. And populist politics will feature domestically for some time.”

Many of these themes will be repeated across the Western Hemisphere, in North America, the Caribbean and Latin America. Meanwhile China, the rising power, will provide points of geopolitical friction as it cements itself into the global system. Predictability is asymmetric across the globe, however, with the timeline less clear for the Middle East, where political and social complexity makes events hard to forecast with any certainty. “There are so many moving parts, no one can really predict how it’s going to move, how it’s going to evolve,” says Scott.

Resilience to repeated shocks

UK Plc has faced a ‘poly-crisis’ in the past decade, suffering a rolling succession of critical economic events, points out Marcus Wright, Senior Economist and Head of Forecasting and Stress-Testing Scenarios at NatWest Group. “Covid, inflation shock, supply chain shock, interest rate shock, Russia and Ukraine, the list goes on.” But businesses have shown remarkable resilience in these conditions. “They’re managing themselves extremely well. Debt levels are low. While there’s been sluggish growth across the UK and Europe, there hasn’t been a lurch into something more serious.”

Repeated shocks have forced organisations to plan for the unthinkable, argues Scott. “If you can’t imagine someone turning off the global gas supply or satellite connection, it’s impossible to mitigate for that risk. Business is becoming more resilient because it’s shaken off that complacency.”

Nonetheless, there remains an anxiety that resilience won’t remain within tolerance, and that businesses are surviving, not thriving. “If you’re doing a stocktake of resilience factors, the UK scores low in critical areas,” says Marcus. “The country has suffered from a shortfall in investment, year after year. There’s low growth, strained public finances, a hangover from Covid, and now a requirement to mobilise resources to build up our defence.”

Energy security

Added to these stressors is concern over the UK’s energy security due to its high reliance on external supplies of natural gas. “The UK economy is typically extremely vulnerable to high energy prices, and was in the crosshairs as events in the Middle East unfolded,” says Marcus. Where is does produce renewable energy domestically, the country is limited by aging grid technology which lacks the capacity or storage to manage the peaks and troughs of solar and wind power production.

Ongoing conflict in the Middle East is putting pressures on energy prices which could characterise the landscape for some time to come. Initial price drops that followed deescalation in the region have given licence to Iran and the US to renew tensions, suggests Marcus. “They have a cushion in the shape of lower energy prices, until that starts to bite and become a constraining factor again, and they have to come back to the table.”

Investor sentiment and investment opportunities

The geopolitical news cycle is mirrored in business confidence monitoring, which can become a self-fulfilling prophecy. “Where businesses are weak in confidence, bad economic data flow can lead to businesses pulling back, sitting on the sidelines, sticking their foot on the ball rather than investing,” says Marcus.

Confidence in the strength of UK businesses also impacts regional capital flow, with uncertainty reducing the movement of money for investment, trade or business operations across national borders. The UK is struggling to attract foreign investment, as high energy and workforce costs make it uncompetitive alongside the US and China.

AI adoption might offer a solution. If UK businesses get AI adoption right it could create substantial levels of economic value, even achieving the holy grail of resuscitating productivity growth. The US, among the earliest investors in AI, is already stretching the productivity gap. “The market is really optimistic about the return on AI,” says Marcus. “And while the lessons of the dot-com bubble often get cited, one side effect of the dot-com boom was substantial investment into IT hardware, which laid the groundwork for future productivity gains.” The AI model is equity-finance in a productive asset, rather than a debt-finance in an unproductive asset, he argues. “And even if the rich valuations mean a reckoning lies around the corner, it’s still a productive asset through which we can elicit productivity gains. That’s the longer-term view.”

Geopolitical predictions through 2026 and beyond

The geopolitical system is in an extended phase of change, which will be reflected in the latter part of 2026, and includes the possibility of a closer, or at least more stable, US-China relationship. This could be presaged by talks between Donald Trump and Xi Jinping, which take place in Washington in September. “Neither side is in the market for a conflagration in the coming 12 months,” says Scott. “But with stability comes a creeping increase in geopolitical status and prestige for Beijing.”

With a new Prime Minister in the UK, economic shifts are anticipated, but investors will have to wait until the Budget, expected in October, for details of financial policy. “Sovereign debt will likely be one angle, as it’s never too far from the surface,” says Marcus. “Devolution, aspects of re-industrialisation, boosts to house building will all be part of the economic perspective on what it will take to move the dial on UK growth.”

Fallout from the Israeli election in August will doubtless impact the Middle East’s political landscape. “There will be a meaningful shift in Middle Eastern attitudes if Netanyahu is no longer running a coalition government,” says Scott. “It could result in statements of intent in terms of where states are going to invest their money, which will be reflected in the energy markets and the future direction of inflation rates.”

And as the Ukrainian war enters a fifth winter, European security commitments may ramp up, just as and America pivots further out of the continent’s affairs. “There’s a more robust position from Europe than we’ve seen previously because of Ukrainian technological improvements,” says Scott. Pressure will remain on Putin if he has failed to make dramatic gains during the summer, with growing indicators of disquiet in Russia about the protracted war.

Each of these geopolitical shifts will result in significant market impacts – and investors will need to be brave. “Among this awakening of the new global order, there are multiple opportunities,” concludes Scott. “We’re in choppy waters, but they are navigable.”

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Geopolitics, markets and investment

Navigating risk and opportunity in an uncertain world

10 minute read time

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