Geopolitics

Geopolitical risk and uncertainty in 2018 for UK investors

British investors will have to cope with geopolitical tensions and the influence of international relations on the share market in 2018. But can political risk analysis improve your portfolio results? What geopolitical forces are most likely to have a negative (or positive) impact on your returns? And how can you best cope with geopolitical uncertainty while remaining focused on your long term goals?

Before you can address investment questions, it’s important to understand what geopolitics actually is.

What is geopolitics?

In a nutshell, geopolitics is based on the idea that the great economic and military powers of the world are determined by geography. Access to waterways, arable farmland, rich mineral deposits, and location of key trade routes are all geopolitical forces that make a nation more or less powerful on the stage of world history.

The first man to popularise the field of political risk analysis and geopolitics in international relations was Sir Halford Mackinder. Mackinder was born in 1861, studied and taught geography, and would go on to become the Director of the London School of Economics. He’s widely considered to be the father of geopolitics and ‘geostrategy.’

Mackinder’s theory: ‘The World Island’

Mackinder’s grand theory can be summed up in what he called ‘The World Island.’ He argued that the world’s largest landmass ought to naturally be the world’s most powerful region. He then argued that it ought to be the goal of British (and later American) foreign policy to disrupt or contain the natural power bloc residing between Moscow, Beijing, and Tehran.

His analysis of geopolitical forces encouraged British foreign policy makers to disrupt the concentration of power by other countries in ‘the heartland,’ or Central Asia, which Mackinder believed would be the ‘pivot’ of global power.

This theory helps explain the history of British and American intervention (and geopolitical tensions) in places like Persia/Iran, Saudi Arabia, Afghanistan, and Pakistan. A visual representation of the theory can be found below.

geopolotics-world-islandSource: George Gonzalez

Jakub J Grygiel’s Great Powers and Geopolitical Change is an in-depth study of the ‘grand strategies’ of some of the world’s most powerful nations of the past thousand years. Among other things, it covers the rise and fall of the Venetian Republic and Ottoman Empire. It explains how places such as Britain, Spain and Portugal managed to punch above their weight and become ‘first rate’ powers.

Key trade routes

The book concludes the economic and geopolitical power is almost entirely dictated by the emergence of key trade routes. How does that work? Imagine a road running from the heart of Beijing on the east coast of China, all the way across the Eurasian land mass, through Constantinople, across the Balkans, past Venice and up into modern day Germany. For the sake of ease, we’ll call this the ‘Beijing Berlin Axis’.

Roughly speaking, this route governed the balance of power in the world for thousands of years. It linked east and west. And the nations that controlled it – or key parts of it – were more often than not the world’s first rate geopolitical powers.

The Venetians and Ottomans both controlled and shaped this route for hundreds of years. They became extravagantly wealthy and powerful in the process. Places like Britain were far away from the axis of power. We were frozen out. Unimportant.

Britannia Rising

The geopolitical map of the world changed profoundly in the late 15th century. Atlantic states such as England, Spain and Portugal developed boats that could travel long distances in relatively short periods of time. Explorers such as Columbus and Vasco da Gama discovered new trade routes – sea lanes – to America, India, Southeast Asia and China.

These new routes fundamentally changed the balance of power of the world. The overland ‘Beijing Berlin Axis’ was no longer the quickest or easiest route from east to west. It was quicker to travel by sea.

The geopolitical reality shifted. The centre of world power moved towards the Atlantic. British national strategy took full advantage. It wasn’t long before Britain had become the world’s biggest, richest and most powerful Empire. That’s the importance of geopolitics and strategic planning.

Geopolitical risk and uncertainty in 2018

China’s ambitious plan to build a ‘New Silk Road’ from Shanghai all the way to the Atlantic proves that Mackinder’s theory of geopolitical power – revolving around key trade routes and access to natural resources – is just as relevant today as it was at the beginning of the 20th century. But what does it mean for investors?

Oil tensions across the world

Key commodity prices like oil and gold will be a measure of geopolitical tensions. They also serve as an early ‘trip wire’ for inflation. This is related to macroeconomic and monetary policy. OPEC nations like Saudi Arabia and Iran, and non-OPEC nations like Russia, are all keen for higher oil and energy prices to boost their national coffers. Lower oil prices may stoke domestic political tensions in those countries and, by extension, geopolitical tensions with America and Europe.

The geopolitical implications of Trump’s presidency

American foreign policy toward other countries under President Donald Trump is one of great risks/geopolitical questions marks for this year and the next four. Trump’s early moves have exacerbated geopolitical tensions with traditional allies. His policy of putting trade and jobs at the centre of American foreign policy – rather that oil and national security – threatens to upend decades of US foreign policy and create new geopolitical risks.

The geopolitics of Brexit and the EU

Neither Europe nor the UK will be free from their own geopolitical issues in 2018. The triggering of Article 50 of the Lisbon Treaty and the Brexit process will begin to clarify the geopolitical costs and benefits of leaving the EU. A second Scottish referendum may result, increasing geopolitical uncertainty.

Meanwhile, Europe may be the single-biggest geopolitical risk of 2018. Debt problems in Greece persist. Italians are flirting with an ‘exit’ of the Euro. EU leaders insist any country that leaves the common currency must also leave the European Union. Elections in Italy, Russia and Poland may well determine if the world’s centre of economic gravity and geopolitical power shifts back to Mackinder’s ‘Heartland.’

What to do in the coming bear market? The indicators that investors need to watch to anticipate a stockmarket crash are flashing red. Just like in 2007.
Continue reading
The idea all economics comes down to land prices seems arcane. But it isn’t. Land is special. And two recent developments make that painfully obvious.
Continue reading
Charlie Morris and Nick Martin discuss how to invest in insurance firms make their money, and how the best firms manage underlying risk in their portfolio.
Continue reading
After an initial bump, markets took the news of the Italian referendum vote in their stride. Does that mean Italy and Europe are out of the woods?
Continue reading

Latest Geopolitics articles

  • An inconvenient debate

    NEW TOWN, EDINBURGH ­– My good friend and colleague Nickolai Hubble is no stranger to controversy. Truth be told, he likes to stir it quite a bit. This note he penned for Fortune & Freedom (click here to subscribe) is…

    View this article
  • Hey big spender

    NEW TOWN, EDINBURGH – I’d been putting it off for so long… Looked steadily more ridiculous as the months have gone by… And been called a “pirate” (amongst other things) as a result… But it was finally time to get…

    View this article
  • Forbidden energy

    “A lethal dose to anyone within ten yards. Get it while it’s hot!” – Edge of Darkness (1985) NEW TOWN, EDINBURGH – Do I count any nuclear bulls amongst the readership? Anyone stacking uranium rods at home, or stuffing them…

    View this article
  • Solar Summer

    NEW TOWN, EDINBURGH – Edinburgh, like so many cities, looks its best in the sun. When the rays hit it just right, the sandstone skyline shines like gold. And shine it has over the past few days – we’ve had…

    View this article
  • The greenies respond in kind…

    THE MEADOWS, EDINBURGH – My good friend and colleague Nickolai Hubble isn’t one for political correctness. As I like to say, he won’t screw a silencer on his speech. This might preclude him from various other professions and speaking opportunities,…

    View this article
  • The green gangrene

    THE MEADOWS, EDINBURGH – There’s been a bit of drama here at Southbank Investment Research of late. It’s about our Beyond Oil Summit which goes live on Wednesday (get access here if you haven’t signed up yet). The subject of…

    View this article
  • Third time’s the charm

    BROUGHTON, EDINBURGH – Our very first Beyond Oil Summit feels like a different epoch… but it was only last year. Our plans for the event, featuring first-class energy experts on the future of black gold, began at the very beginning…

    View this article
  • A drove of black gold bulls

    BROUGHTON, EDINBURGH – Well, the results are in from Monday’s poll… And I must say, I’m a little surprised: A lot of oil bulls out there – nearly three quarters of respondents. And there I was thinking I had a…

    View this article
  • Searching for the Seven

    BROUGHTON, EDINBURGH – They called them the Seven Sisters. Seven companies which ruled the world. It all began in August 1928, at a castle called Achnacarry. It’s in the Highlands, near Ben Nevis – about half an hour’s drive from…

    View this article
  • Beyond Black Gold

    STOCKBRIDGE, EDINBURGH – A short note from me this morning, I’m just off to interview a certain gold expert based in the microstate of Liechtenstein. This gold discussion will be the final instalment our 2021 Gold Summit – after the…

    View this article

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697. https://register.fca.org.uk/.

© 2021 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑