The Next Big Geopolitical Risk

David Gordon on the Middle East, Europe and the 2011 Risk Management Conference.

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242435_weaponsAs a speaker at this summer’s Risk Management Conference in Muskoka (August 23 – 25), David Gordon, Director of Global Macro Analysis and Head of Research, Eurasia Group, will be sharing his views on major geopolitical risks, present and future, and how they affect investing. In advance of the conference, we asked him to answer questions about those risks. To find out more about David’s presentation and the Risk Management Conference, click here.

This spring we’ve seen tremendous political turmoil across several regions. What are the implications for international investors?

I’ve been heavily involved in international affairs and national security stuff for 30 years, and this is an unprecedented moment in terms of the range of crises and challenges on the world stage. These uncertainties create new risks for investors, but also new opportunities. Our sense is that the next couple of years are going to be defined by this combination of high levels of risk and increased opportunity. I don’t think we’re going back to what we experienced in the summer and early fall of 2008, when it became all risk and everyone went into a defensive stance.

In your presentation, you’ll be exploring a couple of themes. What are some of the major risks you’ll be focusing on?

The first theme is Bin Laden’s death and whether it is a big deal or not. And the answer is yes: it is a big deal. It has some upsides and some downsides. The big upside, I think, is that we in North America and Europe get a lot safer, since it was Bin Laden personally who really refocused this most extreme wing of terrorists on what he called the “far enemy,” rather than terrorize the ones you’re with, which is more the norm. So, on the positive side I think that this will further weaken Al Qaeda, and particularly those elements of Al Qaeda that were working on plots against Europe and North America. On the other hand, if it’s become a safer world in some sense over here, it’s probably going to make things worse in South Asia. The US-Pakistan relation is in crisis, and you’re going to see increasing tension between India and Pakistan. Regionally, for South Asia, this could be a problem. Particularly for India, which has experienced relatively high growth in recent years.

What about other events in the Middle East?

The second theme that I want to talk about is the Middle East, and how it’s entering into a much tougher phase. We’re seeing incumbent regimes consolidating here, and even in places like Egypt and Tunisia the politics are coming together with big economic risks. However, from an investment and global economy perspective, the good news is that it doesn’t appear that we have big risks of further global oil supply loss. I’m pretty optimistic that we are not going to have spiking oil prices that could put pressure on global economic growth. But things are still going to get tougher.  Israel-Palestine tensions are becoming a much bigger part of the politics of the regional unrest, as Palestinians begin to build up to their effort to declare statehood at the UN in September.

Greece seems to be a present and future theme.

It’s astonishing that the most likely countries to default on their sovereign liabilities are all members of the European Union. I’m going to talk about some real dark clouds that are moving in and how incremental responses will not resolve the crisis. The divergence in growth trajectories between Northern Europe and Southern Europe is troubling, but I don’t foresee an end to the euro zone. I do think that we’re in a scenario where the Europeans are unlikely to get ahead of this process. So one of the implications here, interestingly, is that there could quite possibly be downward pressure on the euro against the dollar over the next 12 months.

Is Asia still a growth story?

It’s still the big story. And the main story geopolitically right now is one of course that doesn’t get a lot of attention — as good stories often don’t — that in this world of crises and challenges, U.S.-China relations have actually reached, not a high point, but a rough stabilization after a rocky year and a half. I would argue that it’s a very big plus for the world’s economy that the political leadership in both the United States and China seems to be quite decisive in avoiding a further escalation of the rhetoric and tension that marked 2010 and parts of 2011. On the other hand, China is becoming a tougher place to do business for international firms. So I’ll spend some time talking about China and the fact that the Asian growth story is rapidly broadening. For the past five or ten years it’s been all about China, but  the story is much bigger now. It’s Vietnam, it’s India, it’s South Korea.

To learn more about the Risk Management Conference, please visit the events section of the website. If you are interested in attending the event, please email Garth Thomas to be considered, as limited space available.

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