What are the Geopolitical Factors that affect Stock Market?
Created on 31 Aug 2019
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Updated on 18 Aug 2022
G-E-O-P-O-L-I-T-I-C-A-L? Difficult to understand right?
GEO- stands for World and POLITICAL stands for international relations influenced by geographical factors.
As a whole, it refers to the different geographic influences on political and international relations. The interconnection between world markets helps in the transmission of the impact quite fast as we saw in the case of the sub-prime crisis in 2008.
Geopolitical factors are like beta drivers for the market, which means due to the mixed effects of currency and equity; performance could increase volatility in the financial market.
These factors are different than macroeconomic factors. Macroeconomic factors refer to interest rates, inflation, GDP, etc., whereas Geopolitical factors are all about global macros that affect the market as a whole.
The geopolitical factors impact the stock market’s performance in the following ways:
1) Revenue Or Earnings:
Major geopolitical events positively affect the company’s revenue or earnings because of the added costs faced by companies. These costs can directly change individual stock prices.
2) Worldwide GDP
The global GDP and its growth is the critical determinant for the health of stock market returns. For example, an increase in the GDP of developed markets will lead to better trade flow.
3) Currency Valuations
The geopolitical factors can weaken or strengthen the currency of the country. Any country that has a fixed-rate system can shift its rate on the lower side, which means the stock market in the world will lead to cascading sell-offs due to competitive devaluations.
4) Interest Rates
The stock market and interest rates both are very crucial for the growth of any economy.
Geopolitical factors affect the interest rate over the world that will impact the stock market.
For instance: The US fed interest is the overnight rate that is used as an international benchmark for lending and borrowing. The sharp rise in the US fed rates will result in a fall in the stock market because the money from corporate and retails will go to safer markets than stock markets.
5) Momentum Oriented Trades
The players in the stock market, mostly speculators hold the stocks and bet on future buys that continue to increase its price which leads to cascading sell-offs in the stocks and eventually falls in the stock market.
6) Inflow Slowdown
There are many investors in the market, who consider geopolitical factors as investing signs. Any negative impact of geopolitical factors is taken as a stop sign by these investors and leads to a decrease in the inflow of funds in the stock market, further slowing down market conditions.
7) Recovery In Demand
After any negative effect of geopolitical factors, there is a recovery phase that comes into play in which demand for stocks increases due to the undervalued price of the company’s stock and can have positive implications on stock market.
8) Ratings of Market
Geopolitical factors help in providing a health check of the stock market, which means it helps in identifying the capability of stock markets to sustain in geopolitical tensions and helps in minimizing the geopolitical risks in any unpredictable event. The capable stock markets will get a high inflow of FIIs, due to its ability to recover fast from any black swan event.
For eg: Greek government-debt crisis.
9) Policy Decisions
The policy decisions are taken considering such factors regarding international trade also impact the stock market. For example, trump's policy on an H1-B visa is harmful to the Indian IT industry. (One of the highest contributing industries in Indian stock market). The crux of the matter is the policy related event. It can have a much more significant impact, as global investors will shift their funds quickly to better risk-adjusted markets.
10) Monetary Policy of Central Banks
The geopolitical factors impact the monetary policy of central banks and thus affect the stock market. If the Central Bank increases the supply of money, companies will start to borrow more and invest more. As this measure will increase inflation, stock markets will take a downturn. If the Central bank does the opposite, i.e., curbs liquidity, the economic growth will be hindered along with the stock market.
Knowing how your market reacts to different factors is crucial. However, past research says that these effects are usually short term. The stock market reacts to positive and negative events in a balanced way.
Remember, your opinions matter to the market.
Therefore, learn and learn and relearn. Your investing should be about MAKING Money and not LOSING any of it!
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