“In the midst of chaos, there is also opportunity.”
— Sun Tzu, The Art of War
Investors today face a convergence of geopolitical forces that are redrawing the global financial map. The Trump administration’s return has reignited protectionist trade policies, while shifting alliances in Europe and Asia are forging new corridors that bypass traditional power centers. Layered atop this is the rise of artificial intelligence, a technological upheaval reshaping competitive advantage at breakneck speed. Together, these forces demand a data-first lens for interpreting how global events ripple across markets.
As a market strategist who has spent decades analyzing these intersections for institutional investors, I have observed that short term spikes absolutely require long term thinking. Successful navigation of these waters requires moving beyond headline reactions to quantifiable analysis of true market impacts. This article provides a framework for exactly that kind of evidence-based approach.
I analyzed 68 significant geopolitical events since 1962, including wars, terror attacks, coups, and contested elections. These are some of the key patterns I observed in the data:
Reactions are proportional to geographic proximity. This may seem like a no brainer, but given the dynamics of our 24-hour news cycle, the event in question always seems closer than it really is. The data shows markets closest to the epicenter of an event typically experience 2–3x greater volatility compared to distant marketsInitial recovery periods are short. And I do mean “initial” — the event itself typically takes time to be registered in the economy, but as indexing is prevalent in the portfolio management community, and portfolio managers just have this need to rebalance to the norm. The average drawdown from major geopolitical shocks is 4.8% for global equities, with recovery periods averaging 43 trading daysRun on safe haven assets. Commodities, particularly oil and gold, show 30% higher sensitivity to geopolitical disruptions than equity markets
The data suggests investors consistently overreact to short-term geopolitical noise while underestimating long-term structural shifts. This is where opportunities lie for data-driven investors.
There are a few geopolitical risk tools available to market participants. All come with their own biases. But nevertheless they give a good benchmark to build a model around. Tools like the BlackRock Geopolitical Risk Indicators (BGRIs) is one of note:
BGRIs attempt to track the frequency of “risk-related” keywords across analyst reports, traditional media, and social platformsBGRIs also measure market attention to specific risks relative to historical baselinesSentiment analysis seeks to detail how markets are processing geopolitical information
In my experience as an institutional manager and now in my own portfolio, I developed a “Geopolitical Vulnerability Index” for various asset classes that combines:
Geographic revenue exposure for companies and sectorsSupply chain dependency metricsHistorical volatility responses to similar event typesRegulatory exposure ratings
This approach allows me to take some of the emotion out of adjustment my allocations. Of course this is customized to the exposures in the portfolio! Don’t forget!
Russia-Ukraine Conflict (2022): The Proximity Effect
When Russia attacked Ukraine in February 2022, European markets dipped instantly by an average of 8.2%, whereas U.S. markets dropped only 2.4%. This was consistent with what I refer to as the “proximity effect” — the relationship between distance and market reaction.
The information revealed:
European stocks quoted at a 15% geopolitical risk premium (relative valuation difference) to U.S. equivalents in the initial month of conflictEnergy commodities had price movements with 2.5x typical volatilityDefense stocks outperform wider indices by 18.7% over half a year since the invasion
European Central Bank analysis confirmed that there was a negative geopolitical risk premium inherent in equity markets and that European markets were hit far harder than the rest of the globe. The impact also demonstrated a high correlation with geographical distance from Kyiv, providing measurable evidence of the proximity effect.
Brexit Referendum (2016): Sentiment as a Leading Indicator
This was an interesting one. Because typically, US, Europe and Japan form a triad of alternatives. However, each was going through their own turbulence. For US it was election turbulence, for Japan it was inflationary/growth. And as a portfolio manager, I was sitting at my Bloomberg station, realizing that the usual currency maneuvers wouldn’t work this time around.
And it turned out that the Brexit vote of June 23, 2016 presented one of the clearest case studies of how geopolitical events create both immediate market dislocations and longer-term structural shifts.
The data tells an interesting story:
In the immediate aftermath of the referendum, the FTSE 100 and FTSE 250 fell 9% and 12% respectively;The British pound depreciated by over 14% against the US dollar and 13% against the euro in the three years following the vote;A clear divergence emerged between UK domestic-focused companies and those with international earnings.
Perhaps most interestingly, the UK stock market experienced a significant “de-rating” as investors discounted future growth prospects. Prior to the referendum, the UK market traded at approximately 15x expected earnings, but this multiple contracted to around 13x in the following years, creating a 30% valuation discount to global peers — near 30-year lows.
The currency effect created a clear division in the market: companies with significant overseas earnings benefited from the translation effect of a weaker pound, while domestically-focused businesses underperformed substantially.
US-China Trade War (2018–2020): Sector Rotation Opportunities
The protracted trade war between China and America created widespread sector divergence:
· Highly China-exposed technology hardware companies trailing behind the rest of the technology sector by 13.2%
· U.S. farm commodities were 40% more price volatile during times of key negotiation
· The USD/CNY exchange rate had an 85% correlation with announcement of negotiation breakthroughs
This divergence created space for sector rotation strategies that exploited the differential impacts across sectors.
AI is just made to tackle this problem. All the data across multiple channels being interpreted and analyzed, AI is changing how things are done, and could be a real opportunity for retail investors and investors in more niche trading houses. The big boys have the money but they are also going to be heavily regulated with respect to their use of AI in portfolio management activity. This poses some major opportunities. Some of the ways that AI can be used to support the analysis of geopolitical occurrences:
· Natural language processing algorithms can analyze over 100,000 news articles daily, identifying emerging geopolitical themes weeks before they become popular stories
· Machine learning algorithms can identify non-linear correlation among seemingly unrelated events and specific market segments
· Historical event data-trained neural networks are capable of generating probability-weighted scenario analyses for portfolio stress testing
Perhaps the most important insight from the data is how dramatically market responses differ across time horizons:
83% of immediate market reactions to geopolitical events reverse within 20 trading daysOnly 12% of geopolitical events create lasting structural changes that persist beyond 90 daysVolatility decay follows a predictable pattern that can be modeled with 72% accuracy
This temporal perspective is critical for portfolio construction — what matters for a day trader differs dramatically from what a pension fund manager should monitor.
From experience and patterns seen from the data, I have established a four-stranded framework to build geopolitically robust portfolios:
· Measure exposure measures: Approximate revenue, supply chain, and operational exposure to geopolitical hotbeds per portfolio holding
· Use asymmetric hedging: Leverage cost-effective hedges with positive skew that are only triggered in conditions of geopolitical distress
· Track sentiment divergence: Track where market sentiment splits from quantitative measures of risk, providing potential mispricing
· Maintain strategic flexibility: Build pieces of the portfolio to take advantage of short-term dislocations while maintaining long-term position
This approach translates geopolitical risk from a risk of the unexpected into an alpha opportunity.
In an environment where geopolitical disruptions occur with increasing frequency, the differentiator between successful and struggling investors will be their ability to process and act on data. The most successful portfolios will be those guided by quantitative insights rather than headline reactions.
As we navigate this complex landscape, remember that geopolitical events rarely change long-term economic fundamentals — but they consistently create short-term price dislocations that present opportunities for the data-driven investor.
By developing systematic approaches to geopolitical risk assessment, today’s investors can transform uncertainty from a threat into a strategic advantage.
Join the discussion: How are you quantifying geopolitical risk in your portfolio? Share your strategies in the responses below, or tag me in a follow-up piece dissecting AI’s role in predicting the next crisis