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BlackRock (BLK) is the world's largest publicly traded investment management firm. As of September 30, 2016, it had assets under management, or AUM, of $5.1 trillion. This is ~7% of the total assets under management across the globe.


BlackRock geopolitical risk dashboard

Introduction and highlights
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Relative likelihood and market impact of risks

The risk likelihood and impact chart shows our assessment of the relative likelihood of our top-10 risks and the potential severity of their market impact. Our geopolitical experts identify potential escalation triggers for each risk and then assess the most likely manifestation of the risk over the next six months. The relative likelihood of each event (vertical axis) is then measured relative to the remaining risks. The severity of market impact (horizontal axis) is based on Market-Driven Scenarios (MDS) analysis from our Risk and Quantitative Analysis group and estimates the one-month impact of each risk on global equities (as measured by the MSCI ACWI) if it were to come to pass. Colored lines and dots show whether BlackRock’s Geopolitical Risk Steering Committee has increased (orange) or decreased (green) the relative likelihood of any of the risks from our previous update. We also show our overall assessment of geopolitical risk. Its likelihood score is based on a simple average of our top-10 risks; the market impact is a weighted average by likelihood score of our 10 risks.

The chart shows the changes in our assessment of four risks:

Russia-NATO conflict: risk up
  • Russian ships fired on and seized three Ukrainian boats off the coast of Russian-annexed Crimea in November. Ukraine has since lifted martial law, but tensions remain elevated. Western nations have condemned Russia’s use of force and may impose a fresh round of sanctions.
  • The U.S. Treasury announced new sanctions against Russians accused of electoral interference, hacking and the UK nerve agent attack.
  • NATO formally accused Russia of breaching the 1987 Intermediate-range Nuclear Forces Treaty, which banned land-based nuclear missiles in Europe. The U.S. has threatened to withdraw from the agreement within 60 days if Russia fails to become compliant with the treaty’s terms.
European fragmentation: risk up
  • Italy and the European Commission ended a long-standing battle over Italy’s 2019 budget, agreeing to a reduced budget deficit of 2.04% of GDP. The revisions mostly delayed spending to future years rather than meaningfully changing Italy’s fiscal path. This tees up another confrontation between Rome and Brussels.
  • The “gilet-jaune” protests illustrate the strength of populist sentiment in France. President Emmanuel Macron has effectively abandoned his reform agenda, loosening fiscal policy to appease an angry electorate. We see populist parties targeting the European parliamentary elections in May as an opportunity to strengthen their grip.
  • Brexit talks remain gridlocked after the withdrawal agreement negotiated by Prime Minister Theresa May and the EU was heavily defeated in UK parliament. The EU is taking a wait-and-see attitude but may soften its stance if the UK shifts previous red lines. A delay in the Brexit process appears increasingly likely, although a “no-deal exit” scenario cannot be ruled out. A second referendum or a general election may be required to break the deadlock.
Gulf tensions: risk up
  • The mission of Saudi Crown Prince Mohammed bin Salman (MBS) to diversify Saudi’s economy is under increasing strain amid the killing of a prominent Saudi journalist critical of the regime and a protracted war in Yemen.
  • Momentum is building for legislation imposing sanctions against individuals and entities considered responsible for the humanitarian crisis in Yemen. The U.S. Senate voted in December to end U.S. involvement in the Yemen war and approved a resolution to hold MBS responsible for the death of the Saudi journalist.
LatAm populism: risk down
  • In Brazil, far-right Jair Bolsonaro decisively won the presidential election, and early policy signals indicate a pro-business approach. Newly appointed technocratic cabinet members look committed to build on the reform agenda put in place over the past two years. These reforms – spending curbs, privatizations and a loosening of labor market laws – have supported a gradual economic recovery.
  • In Mexico, early indications of the new government’s near-term policy priorities make us a bit cautious on the economy and asset prices. However, with the uncertainty of elections out of the way, markets may breathe a bit easier.
How it works

The BlackRock Geopolitical Risk Indicator (BGRI) continuously tracks the relative frequency of analyst reports, financial news stories and tweets associated with geopolitical risks. We have used the Thomson Reuters Broker Report and the Dow Jones Global Newswire databases as sources, and recently added the one million most popular tweets each week from Twitter-verified accounts. We calculate the frequency of words that relate to geopolitical risk, adjust for positive and negative sentiment in the text of articles or tweets, and then assign a score. We assign a much heavier weight to brokerage reports than to the other data sources because we want to measure the market’s attention to any particular risk, not the public’s.

Our global BlackRock Geopolitical Risk Indicator has edged down but is still well above its historical average, driven by heightened market attention to our Global trade tensions, U.S.-China relations, Gulf tensions and European fragmentation risks. See the Global overview chart. We view recent declines in attention to each of these four risks as a sign that markets may be growing complacent. We advocate caution instead, and have either upgraded or held steady the likelihood of these four risks.

The BGRI is primarily a market attention indicator, gauging to what extent market-related content is focused on geopolitical risk. The higher the index, the more financial analysts and media are referring to geopolitics.

We also take into account whether the market focus is couched in relative positive or negative sentiment. For example, market attention on geopolitical risks was extremely high during the Arab Spring of 2011. Much of the attention was focused on the potentially positive effects of the regime changes, however. The adjustment for this positive sentiment mitigated the Arab Spring’s impact on the BGRI’s level. Sentiment adjustment also helps us avoid overstating geopolitical risk when risks actually are being resolved.

Here’s the step-by-step process:

  1. BGRI attention: This is the market attention score. The global BGRI uses words selected to denote broad geopolitical risks. Local BGRIs identify an anchor phrase specific to the risk (e.g., North Korea) and related words (e.g., missile, test). A cross-functional group of portfolio managers, geopolitical experts and risk managers agrees on key words for each risk and validates the resulting historical moves in the relevant BGRI. The group reviews the key words regularly.
  2. BGRI sentiment: This is the sentiment score. We use a proprietary dictionary of about 150 “positive sentiment” words and 150 “negative sentiment” words. We use a weighted moving average that puts more emphasis on recent documents.
  3. BGRI total score: This is BGRI attention — (0.2 * BGRI sentiment). We want the indicator to fundamentally measure market attention, so we put a much greater weight on the attention score. A 20% weight of the sentiment score can mitigate spikes at times when risk may actually be receding.
  4. Meaning of the score: A zero score represents the average BGRI level over its history from 2003 up to that point in time. A score of one means the BGRI level is one standard deviation above the average. We weigh recent readings more heavily in calculating the average.

Market impact

Our MDS framework forms the basis for our scenarios and estimates of the one-month impact on global equities. The first step is precise definition of our scenarios – and well -defined catalysts (or escalation triggers) for their occurrence. We then use an econometric framework to translate the various scenario outcomes into plausible shocks to a global set of market indexes and risk factors.

The size of the shocks is calibrated by various techniques, including analysis of historical periods that resemble the risk scenario. Recent historical parallels are assigned greater weight. Some of the scenarios we envision do not have precedents – and many have only imperfect ones. This is why we integrate the views of BlackRock’s experts in geopolitical risk, portfolio management, and Risk and Quantitative Analysis into our framework. See the 2018 paper Market Driven Scenarios: An Approach for Plausible Scenario Construction for details. The BGRI’s risk scenario is for illustrative purposes only and does not reflect all possible outcomes as geopolitical risks are ever-evolving.

BGRI-adjusted market impact

We enhance our market impact analysis by adjusting the market impact scores to reflect shifting market attention over time. When scenarios are first defined, market shocks are calibrated to reflect what is not already priced in to the market by investors. We call this the original estimate.

As market attention fluctuates, the BGRI-adjusted market impact either increases or decreases in severity based on how market attention evolves. For example, an elevated BGRI level relative to the point at which a scenario is first defined would suggest an increase in investor attention. This would result in a less severe BGRI-adjusted market impact relative to our original estimate. The converse result — in the case of a depressed BGRI level — would also hold. We determine a factor that scales the size of the BGRI move since the date of our original market impact estimate to calculate the BGRI-adjusted market impact. We use a sigmoid function to do so, or a statistical technique that is characterized by an S-shaped curve. We then multiply our original estimate of the market impact by (1 – scaling factor) to reach the BGRI- adjusted market impact score.

Market impact of risks
Source: BlackRock Investment Institute, with data from Thomson Reuters. Notes: The chart shows our estimates of the potential market impact on the MSCI ACWI Index, the grey bar shows our original estimate, the black and orange bars show the adjusted impact based on the level of the BGRI. For example, an elevated BGRI level for a risk would suggest increased investor attention and therefore a lower BGRI-adjusted market impact. Estimates are based on analysis from BlackRock’s Risk and Quantitative Analysis group. See the How it works section and the 2018 paper Market Driven Scenarios: An Approach for Plausible Scenario Construction for details. Some of the scenarios we envision do not have precedents – or only imperfect ones. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving. The original estimate for {{chosenRisk.name}} is based on the scenario analysis run on {{chosenRisk.scenarioDate}}. Original estimates are based on the analysis run on the following dates:
{{chosenRisk.name}}: {{chosenRisk.scenarioDate}}

BGRI-specific asset analysis

We are now working to pinpoint assets that have moved along with big changes in individual BGRIs, based on statistically meaningful relationships. We have focused on two risks that are solidly on the market’s radar screen: U.S.-China relations and European fragmentation. The chart below shows the historical ranges of three-month returns for selected assets in three-month periods when the respective BGRI rose (the orange bars) or fell (the green bars) by more than one standard deviation. The analysis focused on three dozen assets we believed are related to these two risks.

Risk assets generally underperformed, and perceived safe-haven assets outperformed, in this analysis. We include times the BGRIs stayed at elevated levels over the three-month time frame. The reason: The level of the BGRIs changes over time even if market attention remains constant. This is to reflect the concept that a consistently high level of market attention eventually becomes “normal.” In other words, the effects of elevated BGRIs wash out over longer periods as investors become more accustomed to the risk. Such declines have often coincided with risk asset rallies.

Past performance is not a reliable indicator of future results. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise – or even estimate – of future performance. Notes: The chart shows the 25%–75% percentile ranges (bars) and average three-month returns (dots) for selected assets during rolling three-month periods when the BlackRock Geopolitical Risk Indicator rises or falls by more than one standard deviation. MSCI USD indexes price returns are used for equities, and Thomson Reuters benchmark indexes total returns are used for government bonds.
Focus risk
BlackRock Geopolitical Risk Indicator

Risk scenario description:

Our view:



Key recent developments

Escalation triggers

Potential market implications

Market impact of risks
Source: BlackRock Investment Institute, with data from Thomson Reuters.
Notes: The chart shows our estimates of the potential market impact on the MSCI ACWI Index. The grey bar shows our original estimate, whereas the black and orange bars show the adjusted impact based on the level of the BGRI. For example, an elevated BGRI level for a risk would suggest increased investor attention and therefore a lower BGRI-adjusted market impact. The market impact estimates are based on analysis from BlackRock’s Risk and Quantitative Analysis group. See the How it works section and the 2018 paper Market Driven Scenarios: An Approach for Plausible Scenario Construction for details. Some of the scenarios we envision do not have precedents – or only imperfect ones. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving. The original estimate for {{chosenRisk.name}} is based on the scenario analysis run on {{chosenRisk.scenarioDate}}.

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As the cyber threat rises, we expect financial markets to pay increasing attention. We see three cyber-related risks and opportunities with a potential market impact: threats to critical infrastructure; threats to specific corporates; and opportunities for cybersecurity.

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    Threats to critical infrastructure
    • Physical infrastructure: Modern economic activity depends on the availability of electricity, meaning any significant interruption to power supply could directly damage assets and infrastructure and force a loss in sales revenue to electricity supply companies and the businesses that rely on them. Our analysis of the potential impact of an attack on the U.S. power grid shows equity market sell-offs, led by utilities and industrials. U.S. Treasuries, the yen and gold would rally. Utility credit spreads would widen, and natural gas rally as an alternative resource.
    • Financial infrastructure: The IMF has now recognized cyberattacks as posing a systemic risk to the financial system. Attacks in advanced economies typically target data or business disruptions, while attacks in emerging markets are more frequently related to fraud. We see the market impact in such a scenario exacerbated by a drop in confidence among market participants. We could see financial stocks leading a global risk-off reaction; Treasuries and gold rallying; and the U.S. dollar benefiting from broad risk aversion and foreign investors liquidating overseas assets to meet margin calls.
    • Technology infrastructure: A cyberattack on technology infrastructure could result in a prolonged outage. This may cause significant disruption and loss of business to industries that rely on these services, as well as reputational damage for the data, storage and internet providers. The effects of such an outage could cascade through supply chains and to other industries such as insurers. We believe large-cap companies would underperform smaller companies, as the top technology service providers and their clients tend to be larger companies. We see the Internet software and services, retail, and insurance industries suffering the most.
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    Threats to specific corporations: Many companies have witnessed sharp share price declines after disclosing cyberattacks in recent years. Attacks have typically targeted companies with large amounts of personal data. Data is a double-edged sword: It has huge value in allowing companies to understand customer trends, but also becomes an enormous burden to protect. The IMF estimated in 2017 that the cost of cyber losses to the U.S. economy range between 0.6% to 2.2% of GDP a year , although this is more than offset by the positive contribution from Internet-based activity. Major financial services and tech companies are often targets but tend to have advanced defenses. We see the utility, energy and defense sectors as among the most vulnerable, although they are now increasing their spending on cybersecurity. Across all industries, risks to watch include companies involved in drawn-out mergers, and firms that rely heavily on third-party vendors.
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    Opportunities in cybersecurity: It is broadly accepted within the technology industry that no cybersecurity provider is able to provide a comprehensive solution — the scope of the threat is too broad. Companies’ chief security officers are charged with patching together a wide range of tools. The existing technology has its faults, but we believe spending is extremely durable given regulatory requirements to demonstrate preventative technology is in place. We find opportunities in four main areas.
    • Cloud computing: Some see cloud technology as vulnerable to an attack, but others believe shifting operations to “the cloud” is one of the best ways to protect against cyberattack. Technology companies are offering two types of cloud-based solutions. The first provides cloud-based network services, making the servers that were previously hackable redundant. The second aims to negate the impact of hack attempts: All of a company’s IP traffic is sent to the cloud, cleaned and returned to the company. This is a thorough method to prevent cyberattacks, but it comes at the cost of speed.
    • Network segmentation: An alternative approach sees companies focusing the bulk of their technology spending on software that “fragments” the network to minimize the damage of a potential cyber risk, rather than looking to prevent hackers from gaining entry altogether. The company is alerted when a hacker has gained access to a very small part of a database/server, and the company can then shut down that part of the operation until the attack is nullified.
    • Identity: User verification is one of the biggest challenges in cybersecurity. Systems are much harder to hack if there is constant verification. This means companies offering solutions that implement regular checks via single sign-on are in increasing demand.
    • Blockchain: Distributed ledgers store information in multiple locations across a single network, meaning that if hackers succeeded in altering one record, it can instantly be identified as different to other records in the system. Blockchain technology is also offering improved data encryption, and producing new and more secure ways of controlling network access, including through multi-signature and multi-party computation cryptography. This can eliminate the need for password-based security systems.
View our previous focus risk
October focus risk
Global trade tensions (comments as of October 2018)

The BGRI for our Global trade tensions risk has risen to more than two standard deviations above its historic average, signaling elevated market attention to global trade issues.

We indicated in January that U.S. President Donald Trump’s 2017 rhetoric on trade would turn into action in 2018. That has proven to be the case, with global trade tensions becoming a key source of geopolitical instability in the world today. The U.S. is in some form of trade dispute with allies and major trading partners in all areas of the world. These disputes are fueling uncertainty about the global growth outlook. We focus on three specific fronts: U.S.-China, U.S.-Europe and U.S.-Mexico-Canada.

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    The U.S. administration has shown hostility toward multilateral and international agreements, evident in its withdrawal from the Trans-Pacific Partnership trade pact, its preference for bilateral versus multilateral deals, and its criticism of the World Trade Organization (WTO). The Trump administration, while blocking appointments at the WTO appellate court, is engaged with Europe and Japan on designing reforms to the WTO that target subsidies and other “unfair” practices currently being used by China. Trump has threatened to withdraw from the WTO if it doesn’t do a better job of serving America’s interests. His administration’s failure to allow appeals judges to be appointed to the WTO could bring the dispute resolution system to a halt.

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    We see a prolonged period of trade and economic tensions between the U.S. and China. Tensions will focus on both the bilateral trade deficit and — perhaps more importantly — China’s industrial policy, with a special emphasis on technology development programs. These have competitive and national security implications for the U.S. Support for challenging China’s practices that appear inconsistent with global trade rules is evident across the U.S. political spectrum. An initial round of tariffs at a rate of 25% on $50 billion of Chinese goods has been implemented. The U.S. is implementing a 10% tariff on an additional $200 billion worth of Chinese imports. The rate is set to rise to 25% from Jan. 1, 2019. China retaliated by announcing tariffs on an additional $60 billion of U.S. imports. We have also seen the reform of the Committee on Foreign Investment in the United States (CFIUS) and passage of the Export Control Reform Act of 2018 (ECRA). This legislation does not single out any specific country, but it is largely seen as a tool for countering Chinese attempts to acquire sensitive American technologies and intellectual property. The symbiotic relationship between China and the U.S. means both sides have incentives to reach an agreement, but security concerns related to technology will keep tensions high.

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    U.S.-Europe disputes center on the U.S. investigations into the impact of steel, aluminum and auto imports on national security. A July 25 meeting between Trump and European Commission (EC) President Jean-Claude Juncker concluded with an agreement to avoid a further escalation of trade tensions, at least for now. In a joint statement, the U.S. and the EU agreed to step back in the implementation of future tariffs and to work toward “zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.” The agreement offered a symbolic “win” for both sides but failed to resolve the core issues. A joint Executive Working Group is now carrying this agenda forward, with a mandate to develop a work plan by mid-November. If negotiators appear to lose control of the talks, or if approval from all EU countries on a negotiation mandate appears difficult to achieve, our level of worry would rise.

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    U.S. withdrawal from NAFTA is a possibility — though unlikely in our view. While the new USMCA deal reduces tensions for now, the next challenge will be ratification. Approval in Mexico and Canada appears likely. Yet ratification by the U.S. Congress is uncertain. Under its TPA, the U.S. Congress is unlikely to vote on the agreement until 2019. The outcome of the November midterm elections will be a key signpost to watch to determine what may come next.

We outline three possible outcomes of rising global trade tensions::

  • Our base case: Continued global trade tensions, but with all sides focused on China. The USMCA replaces NAFTA, and Section 232 tariffs on auto imports are avoided. The U.S. maintains its offensive against China’s industrial policy with a focus on the “Made in China 2025” initiative, leveraging Section 301 to inflict harsh penalties. Chinese retaliation in the form of tariffs — including a higher tariff rate on a smaller number of goods — and non-tariff measures — such as denying licenses and visas or implementing quotas — likely follows. The ratcheting up of tensions between the U.S. and China hurts global risk assets (see U.S.-China relations). Elevated trade tensions weigh on business confidence but not to an extent that reduces investment sufficiently to threaten the global growth outlook.
  • A market-negative scenario: The U.S. imposes sweeping trade-related tariffs and non-tariff barriers against China as talks break down. U.S. allies, including the EU, Mexico and Canada, get caught in the cross-fire. China files claims against the U.S. at the WTO; legislative prospects for the USMCA dim and the U.S. eyes withdrawal; and Trump announces plans to overhaul trade agreements globally and threatens withdrawal from the WTO, further undermining the stability of the global trading system. Business sentiment is hit hard, with lower investment weighing on global growth.
  • A market-positive scenario: Deals are struck on multiple fronts and include: the new USMCA; a deal with the EU to avoid Section 232 tariffs on autos; steel and aluminum tariff exemptions for the EU, Canada and Mexico; and an agreement among U.S. and Chinese leaders to reduce the trade deficit. Technology competition with China lingers as a structural issue to be addressed, though talks among senior U.S. and Chinese officials proceed constructively, averting further escalation.

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