In 2014, the biggest threats to a record-smashing stock market climb mostly flared up outside U.S. borders. At least a few of the usual geopolitical suspects are likely to be repeat offenders in 2015.
Conflict in the Middle East and Ukraine, terrorist attacks, and Europe’s problem child, Greece, remain unresolved factors with the potential to rattle global markets and send investors scrambling for cover.
“Russia is lashing out, the Middle East is fragmenting, Islamic radicalism is expanding, and Europe faces challenges on all of these fronts,” said Ian Bremmer and Cliff Kupchan, who lead New York–based consultancy Eurasia Group, in a recent report.
For investors, it’s important to remember that the impact of geopolitical disruptions on U.S. equity markets is often short-term, sparking outbursts of volatility and broad-based selling that usually dissipates after a few days or weeks (at least in recent years). Sometimes, these shocks can drive pessimism to such extremes that some traders consider them contrarian indicators.
Such events may present attractive entry and exit points for those who focus on the underlying financial health of individual corporations and other “micro” factors. With that in mind, here are four possible headline grabbers to watch out for this year.
China’s government-fueled boom days have topped out and growth, while still positive, is expected to continue slowing. That’s troublesome for some other countries that have grown dependent on supplying China with oil, iron ore, and other basic commodities.
These challenges are likely to persist as China continues its fitful shift toward more of a market-based economy. The unrest that fueled protests in Taiwan against the mainland hasn’t gone away. Any escalation may prompt Beijing to back away from trade and investment deals that could strain relations with the U.S.
The Middle East
According to Eurasia Group, the militant group known as ISIS will probably suffer setbacks in Iraq and Syria, but its radical ideology may continue to spread. Needless to say, chances for broader, lasting peace in the region remain dicey. Even among established leadership, tensions could persist.
Furthermore, the ongoing rivalry between Saudi Arabia and Iran may intensify. These struggles play out as OPEC, the oil cartel, wrangles with clashing agendas among individual members over production targets amid a steep slump in crude prices (see figure 1).
The “sick man” of Europe is Europe—or so it seems. The Continent’s stalled economy, the threat of deflation, the mountainous debt load of some countries, and disagreement among individual European Union countries over what to do about it all remains a real problem for the global financial system.
Unemployment remains sky-high in Spain, Greece, and other countries, a marked contrast to the relative prosperity of Germany and Austria. That raises questions over the EU’s viability as an economic bloc and highlights a pronounced divide between U.S growth prospects and those of Europe and Japan.
The simmering conflict in southeastern Ukraine bears watching. Same goes for the impact on Russia from the West’s economic and trade sanctions, weak oil prices, and a plummeting ruble. If there’s anything predictable about Vladimir Putin, it’s that he’s unpredictable. Don’t discount the prospect of Mother Russia riling things up at some point this year.