Skip to Content

Share this post

Chart of the week: ARE GLOBAL POLITICAL RISKS TOO HOT, TOO COLD OR JUST RIGHT?

26 July 2019

Bob Cunneen, Senior Economist and Portfolio Specialist


Sources:  ‘Measuring Geopolitical Risk’, Caldara, Dario and Matteo Iacoviello, International Finance Discussion Papers, Board of Governors of the Federal Reserve System, January 2018.

 

Just like the climate, global political risks seem to be getting warmer these days. Escalating tensions between Iran and the US, Hong Kong’s protests, North Korea’s nuclear ambitions and Syria’s tragic war are all alarming signs. Yet the key challenge for investors is finding an objective measure of political risk amidst this troubling era of ‘fake news’.

A fascinating temperature gauge for measuring political risks comes from a recent calculation by two economists. The Geopolitical Risk (GPR) Index counts how many newspaper articles mention selective words such as “tension”, “threat”, “terrorism” and “war”. The more times these select words are mentioned, the higher the GPR Index rises. Notably the GPR Index has recorded sharp increases around recent major political events such as the September 11 terrorist attacks in 2001, the 2003 Iraq invasion and the 2014 Russia-Ukraine crisis (red line).

The importance of this political risk measure is twofold. Firstly, the historical evidence suggests that global economic growth and share markets are acutely sensitive to political risks. Secondly, the current GPR reading is above average, suggesting that investors need to be cautious. Whether the potential threats with Iran, Hong Kong, North Korea or Russia intensify or some other major political shock occurs is beyond our ability to forecast. However, we cannot dismiss political risks as just ‘fake news’ when this temperature gauge is rising.


Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.