Insight & Analysis

Don’t let geopolitical risk hide investment and growth opportunities

Published: Apr 2023

Sure, geopolitical and economic risk is high. But in its 2023 Political Risk Report insurance broker Marsh argues corporates shouldn’t let these concerns outweigh growth opportunities.

According to insurance broker Marsh, persistent political instability, economic retrenchment, competition for strategic resources and supply chain diversification will continue to impact strategy at multinationals in the coming year.

The global political and economic environment is likely to remain fragile throughout 2023 as a number of factors work in concert to compound the impact of global risks, argue authors in the risk advisor’s Political Risk Report 2023. For example, persistent political instability, especially when compounded by the impact of inflation, threatens the economic and investment environment and, in some cases, the societal structure of emerging markets.

Polycrisis

Marsh’s forecast follows the World Economic Forum’s Global Risks Report 2023 published earlier in the year. It called this compounding effect of related global risks “polycrisis,” arguing that the simultaneous occurrence of catastrophic events have turned the focus of nations inward. Similarly, Marsh’s Political Risk Report identifies this inward focus on economic security, which often comes at the expense of free trade, as another major shift threatening global trade, security and investment. The report warns that decisions made by key economic powers on various issues – ranging from fertilisers and microchips to the energy transition – will continue to have global repercussions.

Perhaps the most high-profile example of both geoeconomic rivalry and economic retrenchment is visible in the US Inflation Reduction Act (IRA), approved in 2022, says the report. The IRA will channel US$370bn of federal spending to create green jobs and promote domestic manufacturing, a source of concern for European governments who fear it will put Europe’s industrial base for clean technologies at a disadvantage.

Opportunities

However, despite the current elevated risk environment, report authors argue there are at least four significant global economic growth drivers that could fuel economic recovery and improve security.

According to the report, a backlog of infrastructure investment points to a rise in future activity and expansion globally, while the push to meet 2030 net-zero energy transition goals will see a range of innovative investment activity. The need to diversify supply chains to achieve greater food and energy security will continue to attract investment opportunities, as will the substantial rise in government defence spending worldwide to support allies, counter threats, and accelerate the sector’s modernisation.

They present public and private corporations, in every region of the world, with substantial investment and trade opportunities. Combining today’s complex, volatile risks with substantial growth opportunities provides an environment in which credit, performance, and political risk management and mitigation is critical, not only to protect capital, but also to enable growth of existing assets and new investments.

“While it may be unnerving, there are many opportunities for businesses and investors to grow in today’s elevated geopolitical and economic risk environment,” said Nick Robson, Global Head of Credit Specialties, for Marsh Specialty. “If the risks are identified, managed, and mitigated effectively, the prospects for short, medium, and long-term growth frequently outweigh the risks presented by short-term volatility.”

The report flags the rise of the Eurasian Middle Corridor. Despite the impact of Russia’s invasion of Ukraine on supply chains, geoeconomic forces continue to pull Europe and Asia together to realign supply chains. The report highlights that an alternative “middle corridor” is gaining traction, running from China through Kazakhstan, Kyrgyzstan, and Turkmenistan, across the Caspian Sea, and through Azerbaijan and Georgia before connecting to Europe via Turkish railways and ports. The Middle Corridor, as it has become known, provides the shortest overland route from Asia to Europe. The growing transport demand along this route is positive: cargo volumes increased six-fold in 2022.

Elsewhere, the report flags a growing demand for rare earths. In 2021, global demand for rare earths was 125,000 metric tons; by 2030 it is forecast to reach 315,000 tons. This creates enormous pressure on global production, but if managed correctly, the search for rare earth elements offers emerging and advanced economies opportunities for growth.

Key risks

  1. Persistent political instability, especially when compounded by the impact of inflation, threatens the economic and investment environment and, in some cases, the social fabric of emerging markets. Various countries will soon hold, or have recently held, elections that could further fuel social instability and political polarisation.
  2. Economic retrenchment is a dominant trend as governments worldwide focus on their self-interests in national economic security, often at the expense of free trade, further fragmenting international alliances. In 2022, every region felt the impact of the slowing global economy, although some were better insulated than others.
  3. Competition for strategic resources is intensifying as a result of the Russia-Ukraine conflict and the ever-increasing demand for raw materials used in modern technologies. While countries that hold these resources are seeing opportunities for growth, the competition between governments in many places contributes to geopolitical instability.
  4. Supply chain diversification brings new risks, with companies seeking solutions to mitigate against soaring material prices, fluctuating exchange rates, increased shipping costs, and government intervention. While supply chain resilience trends – including reshoring and supply chain simplification – may disrupt many economies and businesses for years to come, they also present opportunities for nimble competitors.

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