Top 10 geopolitical risks the markets might face


A world ordered for decades by globalization and geoeconomics has quickly become a world grounded in geopolitical risk. Accumulating shocks such as the COVID-19 pandemic and the Russia-Ukraine conflict have persisted, significantly reorganizing global structures and relationships in 2023.

The world economy is in a precarious position, with impending economic downturns in the US and Europe, and China experiencing its slowest growth in years. While US policy is to compete responsibly with rival superpowers as it pursues its own interests. Geopolitical tensions are increasing.

Energy and climate change continue to be politically polarizing issues, with global progress notably lacking on the climate transition. However, the recent energy price shock in the wake of Russia’s invasion of Ukraine should catalyze decarbonization efforts, and the Inflation Reduction Act provides significant renewables incentives and investment opportunities in the US.

The below chart illustrates the top 10 geopolitical risks based on their likelihood and impact on the global markets.

![](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Top%2010%20geopolitical%20risks%20the%20markets%20might%20face/U.S.-China-strategic-competition-min-_4_.webp)

## **1. U.S.-China strategic competition**

The current state of relations between the United States and China appears to be moving in a negative direction. This is evident through a series of visits made by high-ranking U.S. officials to China, indicating a concerted effort to stabilize the relationship. However, any improvement in the situation is likely to be delicate and influenced by various events and actions taken by both countries. There is a significant possibility of the situation escalating either unintentionally or deliberately, which is a cause for concern.

A major point of tension lies in the situation involving Taiwan. The United States Congress and some candidates running for the presidency are expected to continue advocating for greater support and closer ties with Taiwan. This advocacy is likely to increase tensions between the U.S. and China. While the likelihood of immediate military conflict is low, the potential for such conflicts to arise over time is growing. China has previously shown its willingness to exert pressure on Taiwan, which introduces risks that could affect investors.

A pivotal moment to watch out for is the upcoming presidential elections in Taiwan, scheduled for January 2024. These elections will hold considerable significance in the ongoing dynamics between the involved parties.

## **2. Russia-NATO conflict**

The invasion of Ukraine by Russia stands out as the largest and most perilous military conflict in Europe since World War II. Unfortunately, we do not anticipate a diplomatic resolution to emerge in the near future. The Russian offensive in the spring did not meet expectations, and Ukraine's efforts to counterattack are progressing slowly. This suggests that a prolonged war of attrition is probable. Moreover, the recent failed uprising within Russia adds to concerns about the stability of the Russian government over the long haul.

The potential for the conflict to unintentionally or deliberately escalate is quite significant, which is a cause for alarm. Looking ahead, the most likely scenario is a prolonged state of political, economic, and military standoff between Western nations and Russia. While Ukraine might not be officially recognized as a NATO member, Western allies have demonstrated a sustained commitment to Ukraine's security, effectively treating Ukraine as part of the Western security framework. Given this commitment, Ukraine's security becomes intertwined with that of the Western nations.

In addition to security concerns, Ukraine will also rely on continued economic support from Western countries in the long run. This multifaceted situation underscores the complex dynamics at play in the ongoing conflict and its aftermath.

## **3. Major cyber attack(s)**

The frequency, size, and complexity of cyber attacks are on the rise, driven by intensifying geopolitical rivalries and the swift progress of technology. This poses a serious challenge as both crucial government systems and private industry networks are susceptible to such attacks. The integration of artificial intelligence (AI) has the potential to profoundly reshape the nature of these threats. While AI can elevate the risk of attacks and disinformation campaigns, it can also offer valuable tools for defense against such threats.

The repercussions of recurrent cyber attacks could extend beyond the digital realm, causing notable disruptions in the economy and markets. Acknowledging the severity of this issue, the U.S. National Cybersecurity Strategy has designated ransomware attacks as a threat to national security. This has prompted a call for heightened regulations and the establishment of basic standards spanning a broader range of industries to enhance cybersecurity measures. This approach seeks to fortify defenses and minimize vulnerabilities in the face of an evolving cyber landscape.

## **4. Global technology decoupling**

The strategic rivalry between the United States and China is inducing a trend of global fragmentation as the two nations engage in deliberate decoupling efforts, particularly with a focus on technology domains. The United States is expected to introduce additional measures that will curtail China's access to critical technologies, centering around semiconductors, cloud computing, quantum computing, and artificial intelligence. Furthermore, mechanisms are likely to be put in place for reviewing and potentially restricting investments in specific Chinese technology sectors.

This trend of managed decoupling is being mirrored by U.S. allies, including Europe and Japan, who are adopting analogous approaches to protect their own technological interests and national security. Conversely, Beijing is highlighting the imperative of achieving self-sufficiency in technology and is undertaking actions to counter the repercussions of U.S. actions. This includes the implementation of export controls on metals that are integral to advanced technologies.

As this strategic competition unfolds, the global landscape is undergoing a notable realignment due to these technological shifts, underscoring the intricate and far-reaching implications of the ongoing dynamics between the United States and China.

## **5. Gulf tensions**

Tensions in the region have been calming down lately, with some positive signs like Saudi Arabia and Iran, as well as Syria and the Arab League, mending their diplomatic ties. The Abraham Accords and the U.S.'s diplomatic actions are also helping Israel and Arab countries work together better. Yet, there's a concern because violence is increasing in the West Bank and Gaza, which could slow down the progress made.

One big worry is about Iran's nuclear program. People are concerned that conflicts might arise from this. While we don't think a new nuclear deal is likely, informal attempts to limit Iran's nuclear activities could help ease worries. As Iran comes closer to having the capability to create and use a nuclear weapon, the chances of military action against Iran increase, according to our thinking.

## **6. Major terror attack(s)**

Al-Qaida has gone through a restructuring phase with new leaders, and it continues to pose a significant threat. What's worrying for Western authorities is its connection with the Taliban in Afghanistan. Additionally, ISIS is regaining strength both in Afghanistan and Syria. This raises the concern of potential attacks on Western targets, both within the countries and overseas. Interestingly, this is happening while Western governments are focusing on other important policy matters.

The U.S. government has pointed out the growing danger of terrorism happening within the country, which they see as the most serious and lasting terrorist threat to the nation. This threat is increasing, especially considering the divided political atmosphere in the U.S. and the upcoming 2024 presidential election. These factors contribute to the elevated risk of terrorism.

## **7. Emerging markets political crisis**

The reduced speed of increasing interest rates in the United States and the decline in the value of the U.S. dollar have relieved some of the pressures on Emerging Markets (EMs). However, challenges persist, including the global economic slowdown, a loss of momentum in China's economic recovery, and the potential long-term consequences of increasing divisions in the international landscape.

We anticipate that there will be differences in outcomes among EMs. Certain middle-income EMs like Brazil and Mexico might be able to ease their economic policies to counter the downward pressure on growth. On the other hand, EMs with high levels of debt, such as Egypt and Pakistan, could encounter obstacles. A concerning factor is the lack of global cooperation regarding debt relief measures, which could complicate matters.

Interestingly, countries within the Association of Southeast Asian Nations (ASEAN) might benefit from changes in trade patterns that stem from the tensions between the United States and China. This shifting dynamic could present new opportunities for these nations.

## **8. North Korea conflict**

North Korea has rejected the idea of engaging in talks with the United States and has taken steps to increase provocations. This involves using aggressive language, organizing public demonstrations, carrying out numerous missile tests, trying to launch a military reconnaissance satellite, and showcasing advancements in their weapons capabilities. In response, both South Korea and Japan are strengthening their defenses, while the U.S. has sent its largest nuclear-equipped submarine to South Korea as a deterrent.

Currently, there doesn't appear to be an immediate threat of a conflict in the region. However, we anticipate that tensions will escalate throughout the year. This could involve more tests of long-range missiles, further enhancements to their tactical weaponry, and even a seventh nuclear test. Despite no imminent danger, we believe that financial markets might not be fully recognizing the seriousness of this risk.

## **9. Climate policy gridlock**

The conflict in Ukraine has brought attention to the importance of energy security. However, we foresee that this crisis will also accelerate the transition towards a more environmentally sustainable world. The disruption in energy supply is expected to bolster efforts for reducing carbon emissions in Europe. This is happening against the backdrop of a competition for leadership in clean energy, as Europe responds to the Inflation Reduction Act (IRA) that is driving investments in the United States.

While the IRA's provisions have led to tensions between the U.S. and its allies, we believe that this legislation will ultimately act as a catalyst for increased global investments in clean energy. Given the divided nature of the U.S. Congress, significant additional legislative action is unlikely in the short term.

Furthermore, multilateral organizations are under pressure to implement reforms in climate finance prior to the 28th Conference of the Parties (COP28) scheduled for November. This highlights the urgency and the evolving landscape of efforts to combat climate change on a global scale.

## **10. European fragmentation**

The conflict in Ukraine has spurred a strong drive towards greater unity among European nations. Additionally, the U.S. Inflation Reduction Act has acted as a motivator for European capitals to throw their support behind domestic industries in the global competition for leadership in clean technology. There has been notable advancement in reforming the fiscal rules within the European Union (EU), with a potential agreement expected by the end of the year.

However, the recent collapse of a coalition government in the Netherlands has underscored the divisive nature of immigration issues. Despite this, there's a positive development in the form of a newly agreed EU migration deal, signifying a step forward in addressing this concern.

Furthermore, the EU is contemplating measures to limit exports and investments to China. While there might be discussions on the specifics, there's a general consensus within the bloc about the importance of reducing risk exposure to China. This reflects the overall direction that the EU is moving in concerning its relationship with China.


This trend of managed decoupling is being mirrored by U.S. allies, including Europe and Japan, who are adopting analogous approaches to protect their own technological interests and national security. Conversely, Beijing is highlighting the imperative of achieving self-sufficiency in technology and is undertaking actions to counter the repercussions of U.S. actions. This includes the implementation of export controls on metals that are integral to advanced technologies.

Top 10 geopolitical risks the markets might face

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