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CFA ECO 5: Geopolitics - Coggle Diagram
CFA ECO 5: Geopolitics
geopolitics from a cooperation versus competition perspective
geophysical resource endowment
institutions
soft power
Coorperation
Determinants of cooperation
If a country is engaged in military conflict, there is a higher cost to cooperation
Rules standardization
Regulatory cooperation
countries set up shared regulatory bodies and rules. Example: the Basel Committee on Banking Supervision (BCBS)
Process standardization
establishing common processes so systems can work across borders. Example: SWIFT, the interbank messaging network
Operational synchronization
physical or technical standards so operations fit together. Example: uniform container size and shape that works across land, sea, air and rail transport and port cranes.
Reciprocation (returning favorable treatment: you open your market, I open mine)
Harmonization of tariffs
Non-cooperation
Arbitrary rules (inconsistent, unpredictable rules)
Retaliation
: responding to another country's action (a tariff, sanction, restriction)
Competition
Geopolitics and its relationship with globalization
Benefit of Globalization -> Increased profits
, NOT stronger environmental, social and governance standards (because they operate in lower cost coutnries)
functions and objectives of the international organizations that facilitate trade
World Bank
main objective is to help developing countries fight poverty and enhance environmentally sound economic growth by providing investment funds
was created to facilitate post-war reconstruction and development.
2 closely affiliated entities
International Bank for Reconstruction and Development (IBRD)
International Development Association (IDA)
International Monetary Fund
ability to lend foreign currencies to a country with an extreme current account deficit
organization most likely to aid a country that is experiencing an economically detrimental current account deficit
was founded with the goal of assisting in the reconstruction of the international payment system
support exchange rate stability and an open system of international payments
World Trade Organization
provides the legal and institutional foundation of the multinational trading system. It is the only international organization that regulates cross-border trade relationships among nations on a global scale.
Geopolitical risk
Tools of geopolitics and their impact on regions and economies
National security tools
Economic tools
Nationalization of key export industries
transferring an activity or industry from private to state control
Financial tools
Restriction of foreign investment
Multifaceted tool
Cabotage
Globalization + Cooperation (multilateralism)
Multilateral trade agreements (WTO)
Open capital flows, tariff harmonization
many countries cooperate under shared rules and institutions (e.g., the WTO). Globalization + cooperation.
Globalization + Non-cooperation (hegemony)
Export subsidies
one dominant country sets the rules and uses its power to shape the system in its own favor. Globalization + non-cooperation
Nationalism + Cooperation (bilateralism)
Collective security agreements (NATO)
Bilateral trade deals
a country deals with other countries one-on-one through separate two-party agreements, rather than through broad shared frameworks. Nationalism (anti-globalization) + cooperation
Nationalism + Non-cooperation (autarky)
Nationalization
Restricting foreign investment, capital controls
Armed conflict
countries seeking political self-sufficiency with little or no external trade or finance
impact of geopolitical risk on investments
Event risk
evolve around set dates, including elections, new legislation, or other date-driven milestones
Impact on investments
Analyze the velocity of geopolitical risk
the pace at which a geopolitical risk impacts an investor's portfolio
High velocity (short term) → Tactical changes
Exogenous risk
are sudden or unanticipated and impact either a country’s cooperative stance, the ability of non-state actors to globalize, or both.
Earthquake, sudden uprisings, invasions, or the aftermath of natural disasters
Black swan risk
Investors will make tactical changes
is an event that is rare and difficult to predict but has an important impact
Market or industry-wide volatility, investor flight to quality
Medium velocity (medium term) → Sector specific changes
Impairs companies' processes, costs and investment opportunities, leading to lower valuations
Risks concentrate in specific sectors, so some companies are hit much more than others
Low velocity (long term) → Asset allocation changes
Long-term risks with ESG and other impacts
Affects choice of asset classes and investment styles
Immediate portfolio impact is more limited
scenario analysis
signposts
Geopolitical Risk Index (GPR)
High GPR → reduces investment, employment and stock market price level (tangible macro effects)
irms pull back after
idiosyncratic events
, meaning one-off shocks that are unlikely to repeat NOT the Recurring ones
Thematic risk
Ongoing civil war, Cyber threat
risks are known risks that evolve and expand over a period of time