Rising Geopolitical Risk and Its Effect on the Global Economy

How Global Political Instability Is Affecting the Economy

As threats of war and political instability persist throughout the world, economists and investors are losing confidence in traditional equity investments. According to a survey conducted by PineBridge Investments, 55% of pension professionals and 54% of asset management professionals named geopolitical risks as the biggest short to medium-term risk to the global economy. Major political events of the past year have led to rising uncertainty in the investment market, including rising tensions between North Korea and the U.S., the ongoing Brexit negotiations, as well as the decline of major political parties around the world. However, as 2017 comes to an end, recent developments are giving some economists and investors cause to be optimistic.

Ongoing Political Uncertainty

While the rise of populism over the past year has led to increasing political uncertainty around the world, global markets are reaching record highs. In the U.S. under the Trump presidency, corporations are seeing record profits and low interest rates are driving investments in the U.S. and abroad. The S&P 500 is enjoying its strongest bull run since World War II, according to Business Insider. Yet, as the markets continue to rise, many economists and investors fear that the global economy is on the brink of another collapse. As Nobel-prize-winning economist Richard Thaler recently stated in The Atlantic, “The unbelievably low volatility in a time of massive global uncertainty seems mysterious to me.” Despite a rising global economy, ongoing chaos in the news has led investors to resort to safe-haven investments like gold.

The Rise of Gold

Gold is typically seen as a reliably safe investment in times of political uncertainty. The price of gold has risen dramatically over the course of 2017, with Apmex reporting $1,248.70 as the current price per ounce, marking a nearly 12% increase since the beginning of the year, according to CNBC. Gold is a tangible investment that tends to outlast short-term distress in the global economy. It is also a way for individuals to diversify their investment portfolios.

While the global stock market continues to climb, some investors fear that a geopolitical catastrophe or the burst of another financial bubble like the one that took place in 2008 could disrupt the market in the coming years, curtailing investments and lowering the price of stocks and bonds across the board. Tensions between powerful nations, nuclear proliferation, and the rise of populism is turning traditional political thinking on its head. As strong as the global economy may seem, a major event could upend this trend at any given moment. This looming cause for concern is one of the main contributing factors behind the rising price of gold, as more people invest their money outside of the stock market.

With the price of gold reaching new heights in 2017, that trend may be here to stay. As reported by CNBC, Citi analysts are projecting that the price of gold will rise to $1,350 by the end of 2018 and as high as $1,370 by 2020.

Signs of Growing Confidence

Yet, the price of gold is retreating in the short-term a bit as the global economy is expected to get a sizeable boost in the next few months. According to Yahoo Finance, the price of gold has dropped 6.6% over the past week in light of several positive economic indicators for corporations and the coming changes to the investment market.

In the U.S., news that the G.O.P. tax overhaul bill has made its way through the first round of voting in the U.S. Senate has given corporations and investors more cause to be optimistic about the future. While the final details of the bill have yet to be determined, the bill would most likely lower the corporate tax rate from nearly 35% to 20%, rapidly increasing profits for some of the world’s largest corporations. Yet, it’s not clear how the bill would affect the economy as a whole over the long-term.

Furthering this trend, U.S. President Donald Trump has announced his pick to replace the current chair of the Federal Reserve Janet Yellen, Jerome Powell. This likely means that Federal Reserve will raise interest rates at a steady pace throughout 2018, giving a boost to equity investments.

Another encouraging sign for the global economy, Brexit negotiations between the U.K. and the E.U. have reached a breakthrough. The U.K. has agreed to pay the E.U. a settlement that could reach as much 50 million euros. News of the breakthrough gave a boost to European markets. The euro zone banking index .SX7E rose 2.3 percent on Friday after the news was announced, according to Reuters.

Conclusion

The market remains strong despite the growing number of geopolitical risks around the globe. Corporate profits and equity investments are expected to rise as the E.U. and the U.K. near an agreement on a “divorce bill” after the Brexit vote in 2016. As the U.S. Federal Reserve prepares to raise interest rates in 2018 and the G.O.P. tax bill advances its way through the U.S. Congress, the U.S. is likely to see an uptick in global investments.

Despite these positive economic indicators, investors are hedging their bets and diversifying their financial portfolios by investing in gold at a higher rate over the long-term. It remains unclear whether the raging global economy is headed towards another recession or whether a geopolitical downturn could affect the markets. Gold may take a backseat to traditional investments over the next few months if the G.O.P. tax bill becomes law and the Federal Reserve raises interest rates, but this outcome is far from assured.


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