The world is now more unstable than during the Vietnam War

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July 7, 2017 5:21 PM

Geopolitical risk indices are at elevated levels relative to the last 100 years, driven by geopolitical threats and terrorist risk.

A worker checks the valve of an oil pipe at Al-Sheiba oil refinery in the southern Iraq city of Basra

Geopolitical risk has been creeping back into the markets.

Most recently, we've seen a flurry of headlines about the situations in North Korea and Qatar, and there are unknowns about the state of US-Russia relations.

Geopolitical risk indices are now at elevated levels relative to the last 100 years, according to chart shared by a Bernstein Energy & Power team led by Oswald Clint, citing data from the Federal Reserve Board.

They aren't at the levels of WWI and WWII, or even 9/11 and the 2003 invasion of Iraq. But they are at higher levels than those seen during the Vietnam War and ahead of the Six-Day War.

Geopolitical instability and oil markets have historically been linked. Tensions and conflicts sometimes lead to oil production going offline, which then leads to higher oil prices. The last couple of years, however, have not seen a significant uptick in oil prices, despite increased geopolitical risk amid the oil supply glut.

"While few of these events have acted to boost oil prices in the last 12 months or so that's a function of elevated inventories," Clint wrote. "Once they drain then stronger oil price volatility may return."

"In that view, it's useful to recognize that when we consider current geopolitical risk relative to that last 100 years, it's high," he added. "Some type of geopolitical outage therefore seems more likely than not to happen. That would be positive for oil prices."

Although geopolitical risk has been linked with oil prices, history has shown time and time again that geopolitical shocks themselves rarely have a sustained effect on markets.

Reviewing data on major geopolitical events in the past 100-plus years, Credit Suisse's former head of research and deputy global CIO Giles Keating and his team previously found that stocks generally bounced back after such shocks.

True, there have been several times that markets didn't recoverasquickly, after seismic geopolitical events such as the invasion of France in 1940 and the Yom Kippur War (which led to a complete realignment of control over global oil).

But even then stocks saw recoveries within 2-3 years, according to Credit Suisse.

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