BlackRock says markets are fixated on inflation; they might miss the next big blowup


May 26, 2021: -While investors have been preoccupied with increasing prices, a flare-up in U.S. and China tensions could catch investors surprisingly, BlackRock warns.

On Monday, BlackRock Investment Institute said that its proprietary Geopolitical Risk Indicator has fallen to its lowest in the last four years, as investors focus on inflation and economic recovery than geopolitics.

That marks a shift in attention from U.S. and China trade tensions or a nuclear attack in North Korea, both of which have rattled markets in the previous years.

“The gauge has been hovering in negative territory this year, which means the investor attention to geopolitical risks is less than the average of the last four years,” the report said.

“As a result, geopolitical shocks can also catch investors more off guard than usual,” the report added.

One of the significant risks markets might be overlooking is the separation of the two largest economies in technology in the world. The analysts noted Joe Biden had continued his predecessor’s tough stance on China “with a focus on critical technologies,” while Beijing prioritized self-reliance in tech.

“We see a high likelihood that decoupling of the U.S. and Chinese tech sectors accelerates in scale and scope, instead of the low attention to” the risks posed by American technology and Chinese technology splitting apart, the report says.

The geopolitical risk indicator of BlackRock is calculated that it uses two metrics. One is a scoring system for positive and negative mentions of geopolitical risks based on the computer in brokerage reports and financial news stories. The second metric is a model for potential impact from geopolitical events on global assets for one month.

Then the two measures are combined to create an index. A positive reading indicates the market performance matches the model’s prediction for reaction to geopolitical risks. Whereas the negative reading reflects markets are moving in a direction opposite to what the model predicts.

While BlackRock did not disclose the exact level of the index, the investment institute said on Monday the indicator turned negative this year for the first time since 2017, which means investors’ focus on geopolitical risks has fallen below the average of the last four years.

BlackRock is the largest money manager in the world, with around $8.7 trillion in assets regarding management. The Wall Street giant’s investment institute conducts proprietary research for clients and portfolio managers.

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