With two wars raging and major elections scheduled on every continent, headline risks for markets in 2024 would seem high. Historical precedent suggests otherwise.

It’s happened. Global investor clients have asked us to consider the implications of nuclear war between Russia and the United States. Purposefully or otherwise, some have altered their investment strategies to attempt to address this risk. But there are no good market hedges for an existential threat to human life. When “worst case scenario” investing becomes a focus, the typical response is inaction. This degrades core portfolios and weakens returns over the long-term.

While some may build physical bunkers, we think that our monetary system might survive and “outperform” in a global catastrophe. However, given the difficulty of predicting when an exogenous shock may occur, we suggest building diversified portfolios that can offset the risks of various potential catastrophes. FIGURE 1 shows some key regional economic crisis events of the past and the difference between local and global equity returns, and how, by implication, indices with diversified exposure across global markets would have performed during some of the worst crises of the past 30 years. That is not always the case, of course. A broadly diversified equity index would not have provided much shock absorption during the global financial crisis, the most sweeping economic crisis since the Great Depression. Similarly, the pandemic of 2020 and its aftermath was an unforecastable global event that saw markets and economies move in concert, limiting the benefits of diversification for a time.

The war in Ukraine has displaced or shifted the volume of commodity exports at a scope last seen in 1974 and the Iran/Iraq war beginning in 1980. We consider the economic repercussions of the war in Ukraine and the interaction with politics in the US and Europe as among the greatest of today’s global risks. The Hamas attack on Israel, while not driving a significant regional conflict immediately, still has the potential to cause similar global disruption.

Russia has redirected its petroleum exports from the West to other markets. However, food commodities and other energy services remain significantly impaired. These shortages could potentially intensify in the year or two ahead. And with a significant oil market share gain for Iran – which has increased its crude output by 55% since 2020 – the share of geopolitically vulnerable energy supplies the world relies on has increased. This points to higher energy prices through a security risk premium. It also points to investments in Western energy supplies – from conventional fossil fuels to alternatives – as a potential portfolio hedge.

With that said, none of the geopolitical disputes – including the friction between the US and China over technology has resulted in a catastrophic loss of global trade. Because inventories of consumer goods bulged higher in late 2022, trade declines in 2023 have helped work down inventories of consumer goods that intrinsically posed a significant recession risk (Figure 3). And now, as discussed in our “Slow then grow” overview, even those trade shocks across the world’s industrial supply chains are broadly abating. 

Among other risks, we believe cybersecurity threats are escalating and collectively may rise to the level of a global shock. With cyber defense being the top priority of corporate chief technology officers, we maintain a thematic overweight in cybersecurity shares in core portfolios.

There are many other “manmade” risks to consider, as well. Country-level risk is likely higher than usual. Key political elections loom at a time when recent surges in inflation have driven popular dissatisfaction.

General elections loom in the year ahead for countries whose equity markets comprise 68% of global market cap. However, nearly all that market cap – 62% – is in the US.  

One doesn’t need to be partisan to see signs of dysfunction in US governance. It took a record 15 ballots to elect a speaker of the House of Representatives in early 2023 (a position second in line to succeed the US president). It took only one vote to remove the speaker following his willingness to cooperate with the opposition party to avoid a US government shutdown. The US election of 2024 will almost certainly bring partisan conflict to new heights (Figure 4). 

The US presidential election is approaching. At present, polling data are too close in our opinion to be of much value at this point. As discussed in North America: an emerging set of new opportunities, the US electorate often votes to keep the US government divided. Right now, a Democrat sits in the White House and Republicans control the House, with Democrats maintaining slim control over the Senate. Legislation needs consent of both chambers, including giving the president additional authority to fund Ukraine or provide support to Israel.  Soon after the election of 2024, the US debt ceiling will also no longer be suspended. 

There would be a stark difference in domestic policies if either party unified control of both Congress and the White House. If Congress is not unified, the president still has significant free rein when it comes to foreign policy and regulatory policy. Regulation of domestic natural resources such as oil and gas, the degree of support for Ukraine, and cooperation with Europe and other US allies would be starkly different in the case that a Republican candidate was inaugurated president in January 2025 compared to that of any Democrat. The way the US chooses to confront its migration issues, trade, and law enforcement at the southern border would also differ starkly, pointing to political risk for Mexico as well, which will also elect a president next year. 

Unlike these issues, economic growth is not easily controlled by a US president. As Figure 5 shows, history on average has been kinder to Democrats than Republicans in the record of economic growth and returns. In our view, this is largely because of the historical fact that Democratic presidents have been chosen in years following a business cycle downturn. Depressed economies have greater room for expansion. There are of course counterexamples to this party bias (see: Jimmy Carter versus Reagan in 1980). Even those, however, are the exceptions that prove the rule: it’s business cycle recoveries that are most important for broad returns and growth measures during a presidential term – not who the president happens to be.