Geopolitical risk has returned as a key factor influencing investment risk and return, crucially becoming one of the most focal concerns for investors. It is imperative that such concerns are navigated through risk mitigants, investment strategies and by maintaining awareness of current global events and developments.

Analysing geopolitical risks with the right mixture of quantitative tools, qualitative analysis, and ongoing monitoring will develop a strong framework to measure and manage such risks whereby decreasing any probability of investment vulnerabilities.

Geopolitical risk is caused by potential threats and uncertainties arising from political, economic, social, and military events or conflicts between countries. Such instances will significantly impact businesses, investments, and global markets whilst influencing market sentiment, macroeconomic stability, counterparty risk and market volatility. Geopolitical risks shape policies such as sanctions, trade controls and investment restrictions, requiring financial institutions to adapt their processes and procedures in response to evolving geopolitical conditions.

Geopolitical risks are challenging due to their unique nature, rare occurrence, and uncertain duration and scope, leading to sharp market reactions when geopolitical shocks materialise. Of the different types of major geopolitical risk events, international military conflicts hit emerging market stocks the hardest, likely because of more severe economic disruptions compared with other events.

Due to rapid shifts in market sentiment, fund managers are driven to reassess their investment strategies. For instance, trade tensions between major economies like the U.S. and China can ripple through global markets, affecting commodity prices, supply chains, and investor confidence. Political unrest in oil-rich regions often leads to price hikes in the energy sector, impacting related investments.

Geopolitical risks can affect specific sectors differently, as an example, an escalation in military conflict might boost defence stocks as governments ramp up spending on military equipment. Conversely, industries reliant on global supply chains, such as technology or manufacturing, may suffer as trade routes become disrupted or tariffs are imposed.

The announcement of extreme retaliatory tariffs by the President of the US, in April 2025 has heightened geopolitical risks for global investments. This policy shift has disrupted global trade dynamics, particularly between the U.S. and China, which Trump views as an economic rival. Additionally, the uncertainty surrounding these tariffs has wreaked havoc in financial markets, resulting in the biggest volatility spike post COVID, causing the value at risk of funds denominated in USD Currency to increase rapidly.

Another event that heightened geopolitical concerns was President Trump's expressed interest in purchasing Greenland. This interest stemmed from the island's strategic significance, given its abundant reserves of rare earth minerals and its pivotal location for Arctic operations, which render it a valuable asset for controlling trade routes and enhancing military positioning. The United States' interest in Greenland also raised significant questions regarding sovereignty and international law, particularly as Denmark and the European Union strongly opposed the proposal.

To reduce the effects of geopolitical challenges, fund managers often adopt diversification strategies by investing in a broad range of asset classes, regions and sectors, aiming to cushion portfolios from sudden shocks. During times of political uncertainty, defensive equity sectors like, healthcare and utilities tend to be less affected by geopolitical disruptions. Additionally, alternative investments such as real estate in politically stable regions or commodities like precious metals can act as safe havens during turbulent times as they help stabilize portfolios when global events disrupt traditional markets.

Geopolitical events can also cause significant volatility in foreign exchange (FX) markets, affecting underlying investments. Hence the adaptation of hedging strategies within funds is deemed vital to manage currency risk effectively.

Geopolitical risks often lead to changes in trade policies and regulations, which can impact the fund sector. For instance, sanctions imposed on certain countries can restrict investment opportunities and affect the value of existing assets whereby fund managers must navigate these regulatory changes, ensuring compliance while seeking new opportunities in emerging markets, requiring a deep understanding of global politics and market psychology to make informed decisions.

While it may seem like the global economy and financial markets are regularly upended by unpredictable and even unprecedented events, there is still much that the financial sector and those charged with safeguarding it can do to protect financial stability.

Financial institutions and their regulators are allocating adequate resources to identify, quantify, and manage geopolitical risks through stress tests and other analyses to determine how such risks are likely to interact with financial markets. In addition, holding enough capital and liquidity is essential to help surmount any potential losses from geopolitical risks.

Geopolitical risks are an ongoing factor in the fund sector, constantly shaping investment strategies and asset allocation. Fund managers play a crucial role in navigating these risks, anticipating their impact, and safeguarding client assets through careful, informed decision-making. By adopting diversification strategies, monitoring geopolitical developments, and staying compliant with regulatory changes, the effects of geopolitical risks can be mitigated, and financial stability can be maintained.

Samantha Jayne Abela is a Risk Analyst at BOV Asset Management Ltd. The author and the company have obtained the information contained in this article from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The author and the company make no guarantees, representations or warranties, and accept no responsibility or liability as to the accuracy or completeness of the information contained in this article. The author and the company have no obligation to update, modify or amend the article or to otherwise notify readers thereof if any matter stated therein, or any opinion, projection, forecast, or estimate set for the herein changes or subsequently becomes inaccurate. The value of investments may go down as well as up. If one invests in a product, they may potentially lose some or all of the money they invest. BOV Asset Management Ltd is licensed to conduct investment services in Malta under the Investment Services Act by the Malta Financial Services Authority.