Investment professionals often talk about geopolitical risk. For those new to investing, the term can be unclear.
For U.S. investors, geopolitical risk typically refers to the added problems and opportunities that come with investing in foreign markets.
In less-developed nations, for example, a change in the political landscape can send markets into turmoil, says Marc Chandler, chief market strategist at New York-based currency broker Bannockburn Global Forex. For instance, in March, a Brazilian high-court judge quashed prior corruption convictions of former Brazilian President Lula da Silva, opening the way for Mr. da Silva to run in next year’s election. Markets reacted quickly and negatively to the news, leading to selloffs of the Brazilian currency, the real, and the bond market.
Political changes usually don’t spark those kinds of reactions in developed countries such as the U.S. or Japan or in Western Europe, where “there is a greater sense of certainty,” Mr. Chandler says. In 2017, it took the Netherlands 225 days to form a government. “In a less developed country, such a long wait for a government would have a toll on the markets,” he says.
Not everything involving geopolitics is short-term. Sometimes analysts focus on identifying longer-term or secular changes in how countries interact with each other to determine where and how the world economy will grow.
