Geopolitical Risk: A Framework for Investment Decision-Making

Geopolitical risk has become a central consideration in investment decision-making in a way that was not true for most of the post-Cold War era. The Russia-Ukraine war, US-China technology competition, Taiwan Strait tensions and Middle East instability have all demonstrated that geopolitical events can have direct and material impacts on investment portfolios.

Our framework distinguishes between three categories of geopolitical risk: background risk (persistent but manageable), elevated risk (requiring position sizing adjustments) and tail risk (requiring scenario planning and hedging). Most geopolitical situations fall into the first category and should not drive investment decisions.

Taiwan represents the most significant geopolitical tail risk in the current environment. A Taiwan Strait conflict would disrupt 90%+ of advanced semiconductor manufacturing, triggering a global technology supply shock with no historical precedent. We assign a 5–10% probability to a major conflict scenario over a 5-year horizon.

The appropriate response to geopolitical tail risk is not to avoid affected assets entirely — the expected value calculation often still favours ownership — but to size positions appropriately and maintain portfolio diversification across geographies and asset classes. Geographic diversification of semiconductor manufacturing, driven by the US CHIPS Act and European Chips Act, is gradually reducing the Taiwan concentration risk.

Research Disclaimer: This article is intended solely for informational, educational and research purposes. Nothing in this article constitutes investment advice or a recommendation to buy or sell any security. BGAM™ scores, scenarios and classifications are model-based analytical assessments for illustrative purposes only.