Geopolitical Risk Counterbalanced by Globalization of Financial Markets, says Report

A long-term investment outlook from Northern Trust notes that while the Russia-Ukraine conflict has the potential to reintroduce a Cold War-style geopolitical variable, this new era of heightened geopolitical risk is counterbalanced by the increased globalization of financial markets.
By Janet Du Chenne(59204)
A long-term investment outlook from Northern Trust notes that while the Russia-Ukraine conflict has the potential to reintroduce a Cold War-style geopolitical variable, this new era of heightened geopolitical risk is counterbalanced by the increased globalization of financial markets.

Northern Trust’s annual five-year forecast for economic activity and financial market returns is developed by its Capital Market Assumptions Working Group, composed of senior investment professionals from across the organization. The outlook includes key risks and themes to guide investors.

Its release this week includes the theme “Geopolitical Risk: A Balanced Assessment”, which notes that due to globalization, the sanctions won’t necessarily affect the capital markets in those countries that have imposed the sanctions, with that impact being restricted by globalization. The drivers of globalization (including the search for yield in emerging markets and ESG investing) are enough to balance the impact in those markets, says Northern Trust.

The outlook also notes that as conflicts are increasingly handled through the financial system – cutting off credit or taking other measure as opposed to military intervention – the risk of geopolitical escalation is reduced. “It could also serve as an economic catalyst, such as potential demand from increased military spending and new energy infrastructure build out,” it adds.

The European Union intends to impose further trade and economic sanctions against Russia, targeting access to EU capital markets, defense exports, energy related equipment and technology and sensitive technology. The measures limit access to EU capital markets for Russian State-owned financial institutions.

These additional sanctions would pertain to securities and money-market instruments (with a maturity of more than 90 days) issued after Aug. 1 2014 by Sberbank, VTB Bank, Gazprombank, Vnesheconombank or Rosselkhozbank. The prohibition extends to any entity or body established outside the Union which is more than 50% owned by any of those institutions (European subsidiaries are not included) and to any legal person, entity or body acting at their direction or on their behalf.

A BNY Mellon spokesperson says the custodian bank is assessing the impact of sanctions. “It is important that we comply with all the recent activities to date,” he adds.

State Street is closely monitoring the evolving situation in Russia, it says in a statement. “As part of this monitoring, we are in regular contact with our local sub custodian bank to ensure continuing service of our clients’ assets and to obtain information, including regulatory or political developments and decisions that may be relevant to our clients’ investments in Russia,” it adds.

«