Geopolitics Take Center Stage in 2018

February 22, 2018

January started with a bang.  The stock market continued its seemingly non-stop ascent, leading many to two rather divergent thoughts; 1) This thing has to end, and 2) Let’s get in!  As February rolled in, another feeling that thankfully has been missing for several years greeted us once again.  The feeling of risk.  February marked the most volatile time we have seen since 2011.  Where we go from here, we don’t know.  But, there’s a good chance volatility, and the discomfort that comes along with that, might be a more normal feeling again.  While several happenings can contribute to that feeling, one notable one this year is geopolitics.

Ian Bremmer, the co-founder of the Eurasia group put this well in a recent whitepaper talking about the top risks of 2018:

“In the 20 years since we started Eurasia Group, the global environment has had its ups and downs.  But if we had to pick one year for a big unexpected crisis…it feels like 2018.  Sorry.”

That’s a tough backdrop!  While talking about predicting an unexpected crisis is a bit of an oxymoron, the point is well taken.  There are several events stacking up this year that look to be able to create an element of geopolitical uncertainty.  To breakdown their report further, here are 5 of the top risks highlighted:

  • China – President Xi has been consolidating power in China. This is being done to an extent that we haven’t seen in decades.  Combine that with China’s willingness to step up more on a global stage while the US potentially moves away, leaves room for China’s dominance, growth, and ideas to flourish.  The model of democracy was once the aspiration of all emerging economies.  Will that be true going forward?
  • Accidents – There are so many places today in which a misstep in words, policy, judgment, or interpretation could itself create turmoil. Some areas ripe for concern are cyberattacks, North Korea, Syria, Russia, Iran’s nuclear deal, and terrorism in general.
  • Global tech cold war – The new arms race is in technology and the leaders of the pack are the US and China. Both countries are looking to grow in big data, artificial intelligence, and so on. The US may still have more talent, but China is training more.  The US is being led by what the private sector wants to do where in China the government can steer more of these initiatives.  The stakes are high as the winner could reap big rewards.
  • Mexico – What will happen with NAFTA and the July 1st Presidential Elections? The current frontrunner, Andres Manuel Lopez Obrador, has an anti-US tone.
  • United Kingdom – Britain voted for a divorce, but may now be having second thoughts. Even if the path towards Brexit remains the course, the continued negotiations won’t leave anyone without some scars.

The February volatility could be the market returning to normal, could be the start of a bigger decline, or could again be a temporary blip on this magnificent recovery’s skyrocketing growth.  Time will tell, but in the meantime, the most important takeaway is to make sure your portfolio is allocated in a way that can handle any of those outcomes.  The markets over time are supposed to be a roller coaster, just make sure you have a seat belt on that fits you.

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