The Hidden Driver: Why Every Investor Must Watch Geopolitical Risk

“The markets are like a school of fish. A single gunshot - real or imagined - and the whole school turns.”
   — Anonymous Hedge Fund Manager

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In 2005, Thomas Friedman famously declared The World Is Flat, arguing that globalization had leveled the economic playing field. Two decades later, that thesis is being dismantled—not by tariffs or treaties, but by something older and more volatile: geopolitical risk.
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Wars, coups, sanctions, and power plays aren’t just headlines, they impact the bottom line of companies. Yet many investors still rely on models that assume stability. That’s a mistake. As the global chessboard tilts, those who understand geopolitics gain a crucial edge.

Geopolitical Risk Isn’t a Side Plot - It’s the Main Event

Geopolitical risk refers to the impact of international events, such as conflicts, policy shifts, and leadership changes, on economic outcomes and the performance of investor portfolios. But too often, it’s treated as an afterthought. That’s dangerous.
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• When Russia invaded Ukraine in 2022, the S&P 500 dropped nearly 12% within weeks.
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• European natural gas prices rose over 1,200% year-over-year, devastating industrial margins.
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• Wheat futures surged over 50%, sparking inflation in countries dependent on Ukrainian grain.
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Understanding which regions carry the most risk and if certain areas become uninvestable, who will benefit, can help investors hedge for the unexpected. And in today’s world, geopolitics increasingly drives the investment story and the returns. Just look at Switzerland's main stock index the Swiss Market Index (SMI),  the most followed in the country. Consisting of 20 of the largest and most liquid Swiss Performance Index (SPI) stocks.
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The SMI surpassed 10,000 in July 2019. It touched an all-time high above 12,000 points on June 17th, 2021, before peaking just short of 13,000 in late December 2021. A few months later, Russia invaded Ukraine and Europe has struggled immensely. The SMI has been in a bear market since September 22nd 2022 after losing more than 20%. This ended the bull market that had reached an all-time record closing price short of 13,000 on 28 December 2021.
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Meanwhile, Canada's leading index, the TSX Composite, crested above 22,000 in March of 2022 in the days following the Russia invasion, and then proceeded to sell-off to 18,300 by July of that year, before going on a multi-year rally that would see it reach a new all-time high above 27,300 in July of 2025.
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So, where is the lesson? Switzerland has had very low inflation compared to Canada in the past five years. The Swiss franc currency has also outperformed the Canadian dollar. But losing Ukraine and Russia as key suppliers of natural resources to countries like Europe has exploded their input costs in industry. Whereas a nation like Canada, rich in natural resources, has seen demand for those resources rise, while its domestic industrial economy remains largely unaffected - hence the rally in equities. So, geopolitics matters a lot when it comes to investing. And, given that no one knows what the future holds, the role of diversification becomes even more important.
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Political Instability Can Erase Decades of Growth - Overnight

Political transitions are no longer business as usual. Across the globe, elections and regime changes are now tipping points.

Consider:

• In Argentina, the election of libertarian Javier Milei shocked markets. Within weeks, the peso was devalued by over 50% and sweeping deregulations upended multiple sectors.
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• In Turkey, President Erdoğan’s unorthodox monetary policy sent inflation soaring past 60%, collapsing consumer confidence and foreign investment.
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• And in China, Xi Jinping’s crackdown on tech and property sectors wiped over $1.5 trillion in market value from firms like Alibaba and Evergrande.
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Each of these examples illustrates a core truth: capital hates chaos. And instability, especially in key economies, can cause capital to flee, fast.
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Supply Chains Are Political Now

Trade isn’t just about efficiency anymore. It’s about security, loyalty, and leverage.

The U.S.–China trade war began in 2018 with a wave of tariffs. But the deeper consequence has been a global supply chain reset. Companies like Apple and Tesla are actively diversifying production into India, Vietnam, and Mexico, hedging against geopolitical fallout.

• Over 80% of the world’s cobalt—essential for EV batteries—comes from the Democratic Republic of Congo. Civil unrest there has already disrupted shipments.
• In the South China Sea, tensions are escalating over Taiwan. A full-blown conflict could sever access to TSMC, which manufactures over 90% of the world’s most advanced semiconductors.

Investors exposed to sectors like tech, autos, and energy must now ask not just what they’re investing in, but where it’s coming from.
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Markets Don’t Wait - They React

Markets are forward-looking, but when it comes to geopolitics, they often react before they understand.

• During the 2019 U.S.–Iran crisis, gold spiked nearly 4% in a single week.
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• After the Russian invasion, Brent crude surged to over $130/barrel, its highest since 2008.
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• The Israeli–Hamas conflict in 2023 caused temporary surges in oil and safe-haven assets, despite no immediate supply disruption.

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Why? Because in geopolitics, perception is reality. Traders price in what might happen—supply shortages, capital flight, sanctions—not just what is happening. Again, diversification, not just across regions, but asset classes can absorb these shocks or reduce them to unnoticable tremors.

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Safe-haven assets like gold, Swiss francs, and U.S. Treasuries often act as shock absorbers. But during true systemic shocks, think the GFC in 2008, even these can exhibit volatility.
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You Can’t Predict, But You Can Prepare

The best investors don’t try to predict the next flashpoint. Instead, they build resilient portfolios.

Here’s how they do it:

• Diversification across geographies, currencies, and asset classes
• Exposure to low-correlation assets like precious metals and commodity-linked equities
• Use of scenario analysis and political risk indices (like the Geopolitical Risk Index, developed by Caldara and Iacoviello at the Fed: GPR Index)
• Allocating to sectors that hold up in crises: consumer staples, utilities, defense, and cybersecurity
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Some hedge funds even leverage alternative data, such as satellite imagery of troop movements or shipping flows, to get ahead of unfolding events.
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Risk Creates Opportunity—for the Prepared

Geopolitical turmoil doesn’t just destroy value—it shifts it. For example:

After the Russia–Ukraine war began, North American LNG exporters saw demand soar. We outlined the benefit to Canada's major index, heavily weighted to natural resources, above.

• As China’s relationship with the West strained, Indian equities and ASEAN markets gained favor.
• Defense stocks like Lockheed Martin and Northrop Grumman surged amid increased military spending.
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Each disruption creates winners and losers. The key is knowing where capital will flee—and where it will land next.
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Final Thought: A New Mandate for the Modern Investor

The age of naïve globalization is over. What replaces it is messier, more regional, and deeply political. For investors, that means adapting - not just to inflation or interest rates - but to shifting alliances, political risks, and cross-border fragilities.
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Staying ahead requires more than just financial models, it demands an understanding of the forces shaping global influence. In times like these stick close to history majors and those who understand global trade. In this new age, geopolitical literacy isn’t optional. It can be your edge.

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