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Geopolitical risk
dashboard
December 15, 2023

Geopolitical Risks – December update Tom Donilon

The global economy and geopolitical landscape have faced repeated shocks over Chairman — BlackRock
the last half-decade. A series of cascading events – including the U.S. trade wars, Investment Institute
the COVID pandemic, Russia’s invasion of Ukraine and the war between Israel and
Hamas – have built on each other, exacerbated volatility, and now hang over the
global economy. Such shocks have accelerated long-term, fundamental changes in
the global order, in our view.
The result, we find, is that geopolitics has become a persistent and structural
market risk. Our BlackRock Geopolitical Risk Indicator, which tracks market
attention to geopolitical risks, sits at its highest level in a year. Geopolitical events
historically have had a short-lived market and economic impact, our analysis of 68
risk events since 1962 finds. Their impact today could be more severe in the new, Catherine Kress
more volatile regime, described in our 2024 Global Outlook. Head of Geopolitical Research & Strategy
Looking ahead to 2024, we expect deeper fragmentation, heightened competition
and less cooperation between major nations. Competing geopolitical and economic
blocs are hardening. The U.S. and its allies in Europe and Asia are increasingly
unified; and China, Russia, Iran – and in some cases, North Korea – are cooperating
more closely than they have in decades. We think these shifts are accelerating the
rewiring of globalization, creating risks as well as investment opportunities. These
developments are all part of the new regime. Stephanie Lee
Key highlights this month include: Portfolio Manager – BlackRock Systematic Active
Equities
• We reaffirm our highest-level Gulf tensions rating given the ongoing war
between Israel and Hamas. The risk of escalation is high, we believe. Thus far,
the war has been contained to Gaza. But the longer and more lethal the Israeli
operation, the greater the chance of escalation, expansion and contagion.
• We keep our U.S.-China strategic competition risk rating at a high level. The
November meeting between President Biden and President Xi helped set a more
Jackson Spivey
positive tone for the relationship and expanded communications in the near
term. But intense, structural competition is the new normal, in our view, Vice President – Geopolitical Research &
Strategy
especially in defense and technology.
• We maintain our Russia-NATO conflict risk rating at a high level. The Ukraine war
will extend into next year, in our view, with no diplomatic solution currently in
sight, a risk of reduced Western support and an ongoing risk of escalation.
Our dashboard features both data-driven market attention barometers and
judgment-based assessments of our top risks. We show market attention to each
risk, assess the likelihood of it occurring over a six-month horizon and analyze its Contents
potential market impact. Risk summary 2-3
Our BlackRock Geopolitical Risk Indicators (BGRIs) track market attention to each Framework 4
risk using mentions in brokerage reports and financial news stories. They integrate Scenario variables 5
natural language processing and machine learning techniques. This assessment How it works 6
helps determine when geopolitical risks start to appear on investors’ radar screens –
and when they start fading.
We also have developed a market movement measure that we believe gives us
insights into how asset prices are responding to geopolitical risks. It integrates
analysis from our Risk & Quantitative Analysis (RQA) team and its Market-Driven
Scenarios (MDS) for each risk. The gauge’s score is based on how similar the market
environment is to the MDS assumptions and how much the MDS-related asset
prices have moved over the past month. See the “How it works” section. We also list
the three assets that we see as the key variables of each MDS.
We continuously update our risk scenarios and refine our methodologies. Our
scenarios are hypothetical and do not reflect all possible outcomes. Our market
movement analyses are not recommendations to invest in any specific investment
strategy or product.
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Top 10 risks by likelihood

Attentio
Risk Description Likelihood Our view
n score
We see cyber attacks increasing in scope, scale and
sophistication as geopolitical competition mounts. Foreign
hackers have infiltrated critical U.S. infrastructure and the
accounts of multiple U.S. officials, exposing key vulnerabilities.
Cyber attacks
Recent large-scale attacks highlight the vulnerability of
cause
business infrastructure, as well. We see cyber activity
Major sustained
increasing in conflict zones and around upcoming elections,
cyber- disruption to 1.22 High
risking disruption. Technological advancements, especially in
attack(s) critical physical
artificial intelligence (AI), could increase the risk of malicious
and digital
attacks. AI systems themselves are also vulnerable. The Biden
infrastructure.
administration is calling for more regulation and raised
standards for critical networks. The latest Defense Department
cyber strategy calls for a more proactive and forward-deployed
posture to defend the U.S. from foreign attacks.

The global terrorism risk is high and rising. Market attention

has hit its highest level in more than a year. The conflict in the
Middle East increases the threat in the region, in the U.S. and
A terror attack in Europe, in our view. Law enforcement and intelligence
leads to officials have cited violent extremists and lone actors as the
Major biggest concern. Al-Qaida and ISIS continue to rebuild and
significant loss of
terror 1.19 reestablish their global reach, and new terrorist hotspots are
life and High
attack(s) emerging. The Sahel region is of particular concern as military
commercial
disruption. takeovers have threatened the West’s efforts to fight against
terrorism. In the U.S., the Biden administration has
underscored the threat of domestic terrorism. We see
heightened risk ahead of the 2024 presidential election.

The U.S. and China have settled into a long-run, competitive

posture. The November meeting between President Biden and
President Xi reflects a serious effort on both sides to bring
stability to the relationship, and market attention to this risk
Tensions
has declined as a result. We see the meeting as a tactical
escalate
exercise, however, not a structural shift in the competitive
U.S. China meaningfully
dynamics of the relationship. More aggressive Chinese actions
strategic over Taiwan 1.16 High
in the South China Sea are meeting resistance by other
competition or in the
regional actors. Taiwan remains a significant flashpoint. The
South China
U.S. is providing increased military and economic support to
Sea.
Taiwan, while China demonstrates a willingness to pressure
the island. We do not see military action in the near term, but
the risk will increase. An important milestone will be the Taiwan
elections in January 2024.

The U.S. and China are pursuing targeted decoupling, focused

especially on advanced and military-related technologies. The
Technology U.S. is undertaking a comprehensive effort to preserve, protect
decoupling and extend its lead in advanced technologies like AI,
between the semiconductors, and quantum computing. This includes new,
Global
U.S. and China more advanced export controls and a proposed mechanism to
technology 0.58 High
significantly review outbound investment in advanced Chinese technologies
decoupling
accelerates in that will likely go into effect in 2024. The scope of these
scale and measures is likely to increase. U.S. allies in Europe and Asia are
scope. discussing similar measures. China is responding by investing
in its own capabilities. This will result in parallel and competing
tech stacks for important technologies.

Russia’s invasion of Ukraine is the largest, most dangerous

military conflict in Europe since WWII. The conflict is at an
The war in
inflection point after Ukraine’s counter-offensive failed to
Ukraine
achieve a major breakthrough. A ceasefire or diplomatic
Russia- becomes
solution currently is unlikely, in our view, but pressure will
NATO protracted, 0.26 High
mount in 2024. We see a significant risk of reduced Western
conflict raising the risk
support as the issue becomes increasingly politicized in the
of escalation
U.S. and parts of Europe. The most likely long-term outcome is
beyond Ukraine.
a political, economic and military standoff between the West
and Russia.

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Attention
Risk Description Likelihood Our view
score
The Hamas attack was the largest, most sophisticated and
deadly attack on Israel since the Yom Kippur War of 1973. The
Regional ongoing war is bringing significant volatility to the region and
conflict has led to a humanitarian crisis. Fighting in Gaza is set to
escalates, continue for some time. We see a high risk of escalation, with
threatening Iranian-backed groups in Lebanon, Syria, Iraq and Yemen an
Gulf tensions energy -0.24 High ongoing threat. The U.S. has deployed significant military
infrastructur assets to the region to support Israel and deter other actors
e and from entering the war. The war has disrupted – though not
increasing eliminated – efforts to enhance cooperation between Israel
volatility and Arab States, including the U.S.-backed deal to normalize
relations between Israel and Saudi Arabia. Thus far, a post-
conflict governing plan for Gaza has not emerged.

Emerging market (EM) economies have been boosted by

central bank rate cuts and resilient growth. Still, headwinds
Ripple effects
remain. China’s sluggish economic activity and the long-term
from the
costs of fragmentation present risks to EM. We expect
Emerging Ukraine war
divergence in EM outcomes. Countries like Argentina with
markets severely stress 0.61 Medium
substantial short-term debt obligations are particularly
political crisis EM political
vulnerable. Others like India, Mexico and Vietnam are likely to
systems and
benefit from supply chain diversification. We worry about a
institutions.
lack of cooperation on debt relief and the impact of a record
number of global conflicts around the world.

North Korea’s nuclear program continues unabated. Kim Jong

North Korea
Un has increased provocations and called for accelerated
pushes ahead
weapons production. North Korea is also growing closer to
with its nuclear
Russia and China. North Korea is now a top arms supplier to
buildup and
North Korea Russia. North Korea successfully launched its first military
takes -0.51 Medium
conflict satellite, heightening tensions with the West. South Korea and
provocative
Japan are bolstering their defenses and increasing ties with
actions such as
each other and the U.S. in response. We do not see an
missile
imminent threat of regional conflict but expect tensions to
launches.
worsen.

The Ukraine war has brought energy security to the fore. The
Developed energy shock is boosting decarbonization plans in Europe
economies amid a race for clean energy leadership as it responds to the
fail to U.S Inflation Reduction Act (IRA). We believe the IRA will be a
increase catalyst for accelerating the development and deployment of
public low-carbon technologies. Tensions are emerging between the
Climate policy investment transition agenda and other priorities, including energy
-0.87 Medium
gridlock or take security and affordability, causing some countries to curb
action to their ambitions to prevent political blowback. We think the
achieve net- U.S. 2024 election represents a pivotal point for further clean
zero energy legislation. Governments announced major initiatives
emission to accelerate clean energy development at COP28 in Dubai –
targets. and adopted for the first time language around transitioning
away from fossil fuels in energy systems.

Market attention to European fragmentation is at its highest

since Russia’s invasion of Ukraine. Europe remains united on
key issues: building up its strategic autonomy and de-risking
The energy
from China, supporting Ukraine, and reforming migration.
crunch and
Disagreements are mainly about execution and financing.
inflationary
Germany’s budget crisis and ongoing disputes with Hungary
European pressures lead
0.81 Low have slowed resolving these disagreements. June 2024 will
fragmentation to a populist
see elections to the European Parliament, including a
resurgence and
Commission President and Commissioners. While recent
economic
polling and elections in the Netherlands and Slovakia suggest
volatility.
increased support for far-right parties in several countries, the
base case is a return of the center-left to center-right
coalition.
Sources: BlackRock Investment Institute. Data as of December 2023. Notes: The “risks” column lists the 10 key geopolitical risks that we track. The “description” column defines
each risk. “Attention score” reflects the BlackRock Geopolitical Risk Indicator (BGRI) for each risk. The BGRI measures the degree of the market’s attention to each risk, as reflected
in brokerage reports and financial media. See the "how it works" section on p.7 for details. The table is sorted by the “Likelihood” column which represents our fundamental
assessment, based on BlackRock’s subject matter experts, of the probability that each risk will be realized – either low, medium or high – in the near term. The “our view” column
represents BlackRock’s most recent view on developments related to each risk. This is not intended to be a forecast of future events or a guarantee of future results. This
information should not be relied upon by the reader as research or investment advice regarding any funds or security in particular. Individual portfolio managers for BlackRock
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Geopolitical risk framework

BlackRock Geopolitical Risk Indicator
1.5 WHO declares
U.S. announces
COVID-19 a
withdrawal from Russia
global pandemic
Iran deal invasion of
1 Ukraine
U.S.
presidential
election
0.5
BGRI Score

U.S.-China Phase One

0 trade agreement
announced

-0.5
U.S. announces
steel tariffs
-1
2018 2019 2020 2021 2022 2023

Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, December 2023. Notes: The BlackRock Geopolitical Risk Indicator (BGRI) tracks the
relative frequency of brokerage reports (via Refinitiv) and financial news stories (Dow Jones News) associated with specific geopolitical risks. We adjust for whether the sentiment in
the text of articles is positive or negative, and then assign a score. This score reflects the level of market attention to each risk versus a 5-year history. We assign a heavier weight to
brokerage reports than other media sources since we want to measure the market's attention to any particular risk, not the public’s.

The BlackRock Geopolitical Risk Indicator aims to capture overall market attention to geopolitical risks, as the line chart
shows. The indicator is a simple average of our top-10 risks. The indicator has increased to its highest level in a year,
indicating rising market concern about geopolitics. Markets are most focused on the risk of a Major terror attack or Major
cyber attack, as well as U.S.-China strategic competition.

We reinforce our high Gulf tensions risk rating given the ongoing Israel-Hamas war and risk of escalation in the region. We
keep our U.S.-China strategic competition risk rating at a high level, given structural tensions in the relationship. And we
maintain a high Russia-NATO conflict rating as we currently see no diplomatic solution in sight. Market attention to our
North Korea conflict risk is low. These risks could have an outsized impact on markets.

Risk map
BlackRock Geopolitical market attention, market movement and likelihood
Higher Likelihood:
U.S. China strategic
competition Major n High
Cyberattack(s)
Emerging markets Major terror n Medium
political crisis attack(s)
n Low
Market attention

Global technology European fragmentation

decoupling
Russia-NATO
conflict

North Korea conflict

Gulf tensions

Climate policy
gridlock

Lesser Greater
Market pricing

Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, December 2023. Notes: The vertical axis depicts the market attention to each of our top-
10 risks, as reflected in brokerage reports and financial media and measured by the BlackRock Geopolitical Risk Index (BGRI). The horizontal axis shows our estimate of the degree to
which asset prices have moved in accordance with our risk scenarios (horizontal axis). See the “How it works” section on p.7 for details. The color of the dots indicates our fundamental
assessment of the relative likelihood of the risk – low, medium or high, as per the legend. Some of the scenarios we envision do not have precedents – or only imperfect ones. The
scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving. The chart is meant for illustrative purposes only. This
material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information
should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular.

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Key scenario variables

How to gauge the potential market impact of each of our top-10 risks? We have identified three key “scenario
variables” for each – or assets that we believe would be most sensitive to a realization of that risk. The chart
below shows the direction of our assumed price impact.

Direction of assumed
Risk Asset
price impact

U.S. building products sector q

Climate policy gridlock U.S. construction materials sector q
U.S. utilities p
Russian equities q
Russia-NATO conflict Russian ruble q
Brent crude p
Latin America consumer staples sector p
Emerging markets political crisis Emerging vs. developed equities q
Brazil debt q
EMEA hotels & leisure q
European fragmentation Italy 10-year government bond q
Russian ruble q
Chinese yuan q
Global technology decoupling U.S. investment grade q
Asia ex-Japan electrical equipment q
Brent crude oil p
Gulf tensions VIX p
U.S. high yield credit q
U.S. high yield utilities q
Major cyberattack(s) U.S. dollar p
U.S. utilities sector q
Germany 10-year government bond p
Major terror attack(s) Japanese yen p
Europe airlines sector q
Japanese yen p
North Korea conflict Korean won q
Korean equities q
Taiwanese dollar q
U.S.-China strategic competition Taiwanese equities q
China high yield q

Source: BlackRock Investment Institute, with data from BlackRock’s Aladdin Portfolio Risk Tools application, July 2022. Notes: The table depicts the three assets that we see as key
variables for each of our top-10 geopolitical risks – as well as the direction of the assumed shocks for each in the event of the risk materializing. The up arrow indicates a rise in prices
(corresponding to a decline in yields for bonds); the down arrow indicates a fall in prices. Our analysis is based on similar historical events and current market conditions such as
volatility and cross-asset correlations. See the “implied stress testing framework” section of the 2018 paper Market-Driven Scenarios: An Approach for Plausible Scenario
Construction for details. For illustrative purposes only. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This
information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular.

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How it works
The quantitative components of our geopolitical risk dashboard incorporate two different measures of risk: the first
based on the market attention to risk events, the second on the market movement related to these events.
Market attention
The BlackRock Geopolitical Risk Indicator (BGRI) tracks the relative frequency of brokerage reports (via Refinitiv) and
financial news stories (Dow Jones News) associated with specific geopolitical risks. We adjust for whether the sentiment
in the text of articles is positive or negative, and then assign a score. This score reflects the level of market attention to
each risk versus a five-year history. We use a shorter historical window for our COVID-19 risk due to its limited age. We
assign a heavier weight to brokerage reports than other media sources since we want to measure the market's attention
to any particular risk, not the public’s.
Our updated methodology improves upon traditional “text mining” approaches that search articles for predetermined
key words associated with each risk. Instead, we take a big data approach based on machine-learning. Huge advances in
computing power now make it possible to use language models based on neural networks. These help us sift through
vast data sets to estimate the relevance of every sentence in an article to the geopolitical risks we measure.
How does it work? First we augment a pre-trained language model with broad geopolitical content and articles
representative of each individual risk we track. The fine-tuned language model then focuses on two tasks when trawling
though millions of brokerage reports and financial news stories:
• classifying the relevance of each sentence to the individual geopolitical risk to generate an attention score
• classifying the sentiment of each sentence to produce a sentiment score
The attention and sentiment scores are aggregated to produce a composite geopolitical risk score. A zero score
represents the average BGRI level over its history. A score of one means the BGRI level is one standard deviation above
its historical average, implying above-average market attention to the risk. We weigh recent readings more heavily in
calculating the average. The level of the BGRIs changes slowly over time even if market attention remains constant. This
is to reflect the concept that a consistently high level of market attention eventually becomes “normal.”
Our language model helps provide more nuanced analysis of the relevance of a given article than traditional methods
would allow. Example: Consider an analyst report with boilerplate language at the end listing a variety of different
geopolitical risks. A simple keyword-based approach may suggest the article is more relevant than it really is; our new
machine learning approach seeks to do a better job at adjusting for the context of the sentences – and determining their
true relevance to the risk at hand.
Market movement
In the market movement measure, we use Market-Driven Scenarios (MDS) associated with each geopolitical risk event
as a baseline for how market prices would respond to the realization of the risk event.
Our MDS framework forms the basis for our scenarios and estimates of their potential one-month impact on global
assets. The first step is a precise definition of our scenarios – and well-defined catalysts (or escalation triggers) for their
occurrence. We then use an econometric framework to translate the various scenario outcomes into plausible shocks to
a global set of market indexes and risk factors.
The size of the shocks is calibrated by various techniques, including analysis of historical periods that resemble the risk
scenario. Recent historical parallels are assigned greater weight. Some of the scenarios we envision do not have
precedents – and many have only imperfect ones. This is why we integrate the views of BlackRock’s experts in
geopolitical risk, portfolio management, and Risk and Quantitative Analysis into our framework. See the 2018 paper
Market Driven Scenarios: An Approach for Plausible Scenario Construction for details. MDS are for illustrative purposes
only and do not reflect all possible outcomes as geopolitical risks are ever-evolving.
We then compile a market movement index for each risk.* This is composed of two parts:
1. Similarity: This measures how “similar” the current market environment is to our expectation of what it would look
like in the event the particular MDS was realized. We focus on trailing one-month returns of the relevant MDS
assets.
2. Magnitude: This measures the magnitude of the trailing one-month returns of the relevant MDS assets.
These two measures are combined to create an index that works as follows:
• A value of 1 would means that asset prices reacted in an identical way as our MDS indicated.
• A value of zero would indicate that the pattern of asset prices bears no resemblance at all to what the MDS for a
particular risk would indicate.
• A value of -1 would indicate that asset prices are moving in the opposite direction to what the MDS would indicate.
Markets are effectively betting against the risk.
*This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events
or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any
funds, strategy or security in particular. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as
geopolitical risks are ever-evolving.

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BlackRock Investment Institute

The BlackRock Investment Institute (BII) leverages the firm’s expertise and generates proprietary research to provide
insights on the global economy, markets, geopolitics and long-term asset allocation – all to help our clients and
portfolio managers navigate financial markets. BII offers strategic and tactical market views, publications and digital
tools that are underpinned by proprietary research.

General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any
person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. This material may contain estimates and forward-looking statements,
which may include forecasts and do not represent a guarantee of future performance. This information is not intended to be complete or exhaustive and no representations or warranties, either express or
implied, are made regarding the accuracy or completeness of the information contained herein. The opinions expressed are as of December 2023 and are subject to change without notice. Reliance upon
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