19 Apr 2024 3 min read

Geopolitical risk and the global market outlook

By Sonja Laud , Colin Reedie , Tim Drayson

As the Middle East conflict enters a worrying new phase, we assess what the uptick in geopolitical risk means for investors.


The latest escalation of hostilities in the Middle East, ongoing war in Ukraine and simmering tensions elsewhere in the world have put geopolitics squarely at the forefront of investor thinking.

These conflicts – and potential conflicts – involve enormous human suffering; our thoughts are with everyone affected. Where they affect the assets we manage, we focus on managing risk to achieve our clients’ long-term objectives.

Our approach to geopolitical risk in general is summarised by the motto: 'prepare, don’t predict'. This means we undertake rigorous scenario planning, rather than seek to forecast imponderable outcomes.

Vulnerable markets

This post reflects our thinking on this theme, which we have shared with our clients both in the wake of Russia’s invasion of Ukraine and since the events of October 7, 2023.

Many investors appear to have taken the latest flashpoint in their stride. This has involved Iran and Israel engaging in direct confrontation of a nature unprecedented in their history.

The situation is clearly complex and fast-moving; we continue to monitor it closely. The extent to which these developments might affect our clients’ investments depends to a large extent on how they impact the outlook for global growth and inflation.

While markets are pricing in fewer interest rate cuts over the course of this year than previously anticipated, valuations still indicate something of a ‘Goldilocks’ scenario in which growth is resilient and inflation continues to moderate.

Such optimism makes markets vulnerable to shocks, in our view, whether from geopolitical strife, national politics or macroeconomic data.

Reducing risk

Should the situation in the Middle East deteriorate further, we believe the direct impact on global growth would likely be limited, due to the relatively small size of the economies of countries in the region.

However, fresh hostilities could stoke a spike in oil prices and disrupt trade routes, with knock-on effects for inflation and monetary policy. This would likely impact companies, consumers and risk assets worldwide through higher energy prices and the cost of debt.

It’s worth noting that our clients’ exposure to Israeli assets is minimal, while sanctions make Iranian assets essentially uninvestable.

More broadly, in light of the narrow path for the global economy that investors are pricing, the interconnectedness of markets and the broad range of both political and geopolitical risks on the horizon, we anticipate further volatility.

Given this backdrop, we are positioning defensively within our multi-asset portfolios. We have also reduced credit risk within our active fixed income strategies.

Uncertainty and change

Looking beyond the current geopolitical fault lines – and even the market-moving political events scheduled later this year – we believe uncertainty and change are probably the only two constants investors can expect. That’s because we’re all adjusting to a multi-polar world, during a period of frenetic technological advances.

This makes diversification[1] more important than ever, in our view, to help withstand a range of economic scenarios – and mitigate the impact of any single market event.


[1] It should be noted that diversification is no guarantee against a loss in a declining market.


Sonja Laud

Chief Investment Officer

Sonja is CIO of LGIM, having joined the business in January 2019 as Deputy CIO with responsibility for LGIM’s Solutions, Global Fixed Income, and Active Equity teams. Sonja joined from Fidelity International where she held the title of Head of Equity, responsible for the Global, Equity Income and UK Portfolio Managers as well as the Investment Director team.

Sonja Laud

Colin Reedie

Head of Active Strategies

Colin has responsibility for our Active Strategies team as well as overall portfolio management responsibilities for our Global Credit and Core Plus strategies. Colin joined LGIM in 2005 from Henderson Global Investors, where he was Head of Investment Grade Credit Fund Management. He has 25 years’ experience in bond markets, specialising in non-government debt, and he has previously worked for Henderson Global Investors, Scottish Widows and Scottish Amicable.

Colin Reedie

Tim Drayson

Head of Economics

Tim keeps a close watch on global economic developments, with a particular focus on the US. He believes nothing good ever happens after midnight, which is why he is rarely spotted out late. Tim joined in 2008 from the number-one ranked economics team at ABN AMRO, with prior experience from HM Treasury, and graduated with a MSc from the University of Nottingham. When not crunching economic data, he can be found studying the weather forecast, analysing his cycling statistics or looking anxious on three-foot putts.

Tim Drayson