EQUITY MARKETS SHRUGGING OFF WORSENING GEOPOLITICAL RISKS: ANALYST

Equity markets are right for failing to price in worsening geopolitical risks — for now, Citi Research says in a new report.

Russia’s annexation of Crimea and ISIS’s rejection of the Sykes-Picot borders in the Middle East have brought border disputes to the forefront.

Tina Fordham, Citi’s chief global political analyst, noted rising tensions come as defence budgets fall, the public has less appetite for military intervention, and anti-establishment sentiment is on the rise.

“In the short-term, we think investors indifference to geopolitical risks is largely justified,” Ms. Fordham said in a report. “But given deteriorating security and political fundamentals, and the prospect of waning QE, this is unlikely to last.”

She noted that geopolitical risks usually affect markets via either a growth or oil price shock, or both, as was the case with the 1973 crisis.

Central bank support is limiting the impact of weak growth on markets, while the emer- gence of U.S. shale has muted the impact of an oil price shock.

But Ms. Fordham is concerned about how long central bank action and shale supply can continue to mask geopolitical risk.

The analyst also said the economic impact of political tensions is not restricted to conflict zones. Specifically, she considers the Russia-Ukraine conflict as the one most at risk of becoming “systemic” since Russia is a large economy and a major commodity producer.

Even with relatively mild sanctions, Ms. Fordham noted that the “Russia impact” alone is estimated to lower eurozone growth by as much as 0.3% annually. She also warned that an escalation involving disruptions to gas supplies could throw the eurozone economy back into recession.

“With QE on the wane and deferred oil prices buttressed by the negative impact of geopolitics on future supplies, the potential for supply dislocations remains significant,” Ms. Fordham said.