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Investing amid geopolitics: country risk and exposure
· Issue or flashpoint
Widely agreedMost analysts agree.
How wars, sanctions, tariffs and politics affect investment returns, and the usual ways investors gain or limit exposure to a country.
See it on the Geopolitics map →The picture
Country risk covers expropriation, capital controls, currency crashes, sanctions and war. Russian stocks held by Western funds became nearly worthless in 2022 after sanctions and index removal. Common exposure routes: broad global or emerging-market index funds, single-country ETFs, US-listed ADRs of foreign firms, and sector funds such as defense or energy. Index weights matter: China, Taiwan, India and South Korea make up most of emerging-market indexes. This is informational, not advice.
Why it matters
Geopolitical shocks usually hit markets briefly, but those that move energy prices, inflation and interest rates, as in 1973, 2022 and 2026, can reset valuations, including property cap rates.
Think of it like
Like cap rates across submarkets: a riskier market must offer a higher expected yield to attract the same buyer.
Key facts and numbers
Market data from MSCI and other index providers, the Federal Reserve economists' Geopolitical Risk Index (Caldara and Iacoviello), and the record of past shocks such as Russia in 2022.
What to watch
Outlook: whether markets underprice tail risks such as a Taiwan crisis, and whether spreading money across countries still protects when shocks go global.
Connections (4)
▸African Continental Free Trade Area (AfCFTA) is a long-term theme in Investing amid geopolitics: country risk and exposureOutlook
The relationship
Investors see the AfCFTA as a long-run case for African consumer, logistics, banking and telecom firms that could sell across borders. Today access is thin: few large stock markets, low liquidity and currency risk. Most investors reach Africa through frontier or emerging-market funds, South African listings or dollar bonds. Real progress, not the agreement itself, would drive returns.
Since when and why
Pan-African; trading began in January 2021; the larger exchanges are in Johannesburg, Lagos, Nairobi and Casablanca.
How solid?
Outlook, not proven: UNCTAD data show intra-African trade still low, so the investment case rests on projections such as the World Bank's 2020 study.
What to watch
Informational, not advice: whether implementation speeds up enough to change company earnings, and whether coups and currency crises outweigh the gains.
▸China's economy: property bust, deflation, export surge is a central question in Investing amid geopolitics: country risk and exposureWidely agreed
The relationship
China has the world's second-largest stock market, yet foreign investors have cut exposure since 2021 over the property bust, crackdowns on tech firms, sanctions risk and Taiwan. Chinese stocks lagged badly in 2021–23 before rebounding in 2024–25 on stimulus and AI hopes. US rules now bar some investment in Chinese military-linked firms and in Chinese AI and chip ventures.
Since when and why
Shanghai, Shenzhen and Hong Kong markets; US outbound-investment rules in force since January 2025; Chinese ADRs in New York face periodic delisting threats.
How solid?
Widely agreed: index returns, fund-flow data from EPFR and others, US Treasury investment rules, and foreign-holdings data from China's central bank.
What to watch
Informational, not advice: analysts split on whether Chinese stocks are bargains or 'uninvestable', and on how far US–China tensions could force sales.
▸Investing amid geopolitics: country risk and exposure must price in Taiwan Strait tensions and PLA drillsWidely agreed
The relationship
A blockade or war over Taiwan is the classic low-probability, very-high-impact risk. Bloomberg Economics estimated a war could cost about $10 trillion, roughly 10% of world GDP. Taiwan is about a fifth of the MSCI Emerging Markets index and TSMC alone about a tenth, so many fund holders carry this risk without realizing it.
Since when and why
Bloomberg Economics estimates, January 2024; Warren Buffett's Berkshire Hathaway sold its entire TSMC stake in 2022–23, months after buying, citing geopolitical concerns.
How solid?
Published scenario studies (Bloomberg Economics, Rhodium Group) and index weightings; how markets price the risk is inferred from muted reactions to drills.
What to watch
Whether markets underprice the risk, and how sanctions, capital controls or asset freezes would hit investors in both China and Taiwan.
▸European rearmament (ReArm Europe) lifted defense stocks in Investing amid geopolitics: country risk and exposureFact
The relationship
Expected spending lifted European defense shares sharply: the Stoxx Europe Aerospace & Defense index hit records in 2025, at times up more than 50% for the year, and Rheinmetall rose more than tenfold from early 2022. Fund firms launched Europe-focused defense ETFs. Shares often drop on peace-talk headlines, showing how much future spending is priced in.
Since when and why
European stock markets from March 2025, led by Rheinmetall, Leonardo, Thales, BAE Systems, Saab and Hensoldt.
How we know
Index and share-price data are public; jumps line up day by day with budget announcements and dips with peace-talk news.
What to watch
Informational, not advice: analysts disagree on whether valuations already price in years of spending, and how a ceasefire would affect orders.