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Geopolitics Is No Longer a Tail Risk
Global political tensions reshaping energy and technology have shifted from periodic sources of volatility to a defining feature of the economy.
- Volatility & Risk
Key Points
Events once thought of as geopolitical tail risks are now common occurrences embedded into the economic landscape.
The conflicts in the Middle East, Russia’s war in Ukraine and U.S.-China technology competition are examples of conflicts dominating markets.
The question is whether investors are underestimating how deeply political risks are driving markets.
Investors often ask which geopolitical tail risks keep us awake at night. Increasingly, the honest answer is: they are no longer tail risks. The conflict in the Middle East is disrupting major shipping routes and global energy markets, the war in Ukraine has rewritten Europe’s investment priorities, and the U.S.-China technology race is accelerating by the month. These are not low-probability events lurking on the horizon. They are the new baseline. The challenge for markets is not identifying the shocks. It is understanding how long they remain embedded in the economic landscape.
First, the Middle East. The re-escalation of the Iran-U.S. conflict is once again threatening the world's most important energy and shipping corridors. Iran continues to exert pressure over traffic through the Strait of Hormuz, while Yemen's Houthis have announced actions targeting Saudi shipping through the Bab al-Mandab Strait, the critical gateway to the Red Sea. Gulf states remain divided over how the conflict should be resolved, reducing the likelihood of a coordinated regional solution. Investors should therefore prepare for intermittent disruptions rather than a quick diplomatic breakthrough.
Second, Ukraine. Russia has intensified ballistic missile and drone attacks on Kyiv despite making little meaningful territorial progress in eastern Ukraine. Meanwhile, improved Ukrainian strike capabilities have increasingly targeted Russian supply lines, fuel depots, and oil infrastructure, including routes supporting Crimea. The result is a war that is shifting from territory to economic attrition. Energy markets are already feeling the effects. Diesel and refined-product markets remain unusually tight, helping keep distillate prices elevated even when crude prices appear relatively stable.
Third, technology. Moonshot AI's latest Kimi model is a reminder that the AI race between China and the U.S. is accelerating rather than slowing. What began as a commercial competition has evolved into a strategic contest involving intellectual property, national security, and technological leadership. Some U.S. policymakers have openly questioned whether American technological advantages are adequately protected. Investors should remember that AI is no longer merely an earnings story. It has become a geopolitical one.
The common thread is that the world's most important growth drivers, energy systems, and technological platforms are all becoming more politically contested. Markets continue to celebrate AI-driven productivity gains and resilient economic growth. Yet the same forces supporting growth are also intensifying geopolitical rivalry. The lesson for investors is uncomfortable but clear: geopolitics is no longer an occasional source of volatility. Increasingly, it is becoming the macroeconomic backdrop itself. The question is not whether these risks will disappear. It is whether investors have fully appreciated a world in which disrupted shipping lanes, persistent energy insecurity, and technological competition are no longer exceptions to the rule, but are priced as routinely as inflation prints or earnings season.
— Peter Wilke, CFA – Head of Tactical Asset Allocation, Global Asset Allocation
Interest Rates
At its June meeting, the Federal Open Market Committee (FOMC) held the target range unchanged as expected, but Chairman Kevin Warsh’s first meeting delivered notable developments. The Committee removed much of the statement’s boilerplate language, distilling it to just four short paragraphs. The Summary of Economic Projections (SEP) showed meaningful upward revisions to inflation and the expected rate path for the year.
Warsh’s press conference was also notably different. He avoided forward guidance, reaffirmed the dual mandate, and announced five task forces – covering the balance sheet, Fed communications, economic data, productivity and jobs including AI, and crucially the inflation framework, but not the 2% objective itself. His “wide lens, but narrow remit” framing underscored the emphasis on price stability.
The task forces may lead to more medium-term change than we initially expected, but near-term policy should remain dependent on incoming U.S. data, especially inflation. While it was not surprising to see markets price in more hikes, the data must still justify one – which we view as less likely than current pricing implies.
— Dan LaRocco, Head of Liquidity, Global Fixed Income
- The first FOMC meeting under Chairman Kevin Warsh marked a notable shift in communication style.
- Markets have priced in more hikes this year, but incoming data, especially inflation, must justify one.
- We view a hike as less likely than current market pricing implies and remain neutral on duration.
Credit Markets
High yield generated modestly positive returns in June, as coupon income offset modest price declines and spread widening. The result came as the broader risk rally paused after one of the strongest two-month periods in recent history, with geopolitical volatility, concerns over artificial intelligence-related cost pressures, and sticky inflation weighing on investor sentiment.
Issuance remained active despite the softer market tone. High yield supply totaled $34.1 billion in June, roughly 35% above the month’s historical average of $25.3 billion and ahead of the 24-month average of $26.7 billion. Year-to-date gross issuance now stands near $186 billion. Since 2010, June has ranked as the sixth most active month for high yield issuance, sitting below the typical peaks in May and September.
We expect issuance conditions to remain supportive in the second half of 2026, helped by receding Middle East conflict risk, strong issuer balance sheets, and supportive regulatory policy, though activity may slow as markets enter the seasonal summer lull.
— Ben McCubbin, Co-Head of High Yield, Global Fixed Income
- High yield generated modestly positive returns in June, with coupon income offsetting modest price declines and spread widening.
- June issuance totaled $34.1 billion, roughly 35% above its historical average since 2010.
- Issuance conditions should remain supportive, though activity may slow during the seasonal summer lull.
Equities
Market returns remain increasingly concentrated in a small group of mega-cap stocks, but stock-level dispersion remains elevated relative to history. Expected dispersion has moved above its longer-term average year-to-date, signaling a wider spread between winners and losers even as index leadership remains narrow.
Beneath the index-level concentration, equity performance remains meaningfully differentiated across individual stocks. Technology and artificial intelligence-adjacent companies are still driving headline performance, but outcomes across sectors, styles, and companies remain uneven.
This creates a more constructive backdrop for systematic and active approaches that can identify relative winners and losers. Concentration remains a defining feature of the current market, but elevated cross-sectional variation suggests the opportunity set is broader than index-level leadership alone implies.
— Jordan Dekhayser, Senior Equity Client Portfolio Management and Daniel Kim, Associate Equity Client Portfolio Manager
- Expected dispersion has trended above its longer-term average year to date.
- The elevated spread between winners and losers signals a broad opportunity set.
- Cross-sectional variation persists despite narrow index leadership.
Real Assets
Global REITs have delivered a strong start to 2026, generating a 9.4% year-to-date total return, including an 8.5% gain in the second quarter. Notably, that performance has come despite rising bond yields and shifting expectations for central bank policy, challenging the view that REITs are simply a “rates trade”. Instead, investors are increasingly rewarding companies with strong earnings growth, healthy balance sheets and resilient fundamentals.
Operating trends remain constructive across much of the real estate market. Demand for higher-growth sectors such as data centers and health care / senior housing continues to be supported by powerful secular tailwinds, while improving conditions in previously overlooked areas are broadening the opportunity set. Retail real estate, for example, is benefiting from lower vacancies, rising rents, and increasing foot traffic, particularly among younger consumers.
For investors, REITs offer a differentiated mix of income, earnings growth, inflation protection, and diversification at a time when broader equity market returns remain concentrated in a relatively small number of companies.
— Jim Hardman, Head of Real Assets, Multi-Manager
- Global REITs have performed well, despite shifting central bank policy expectations.
- Investors are increasingly rewarding attractive fundamentals and earnings growth in both structural growth sectors and areas with improving conditions.
- We affirmed a tactical overweight to real assets. Since reducing our underweight to real estate in April, the asset class has continued to show positive trends.
Unless noted otherwise, data is sourced from Bloomberg as of July 2026.
Main Point
Global politics no longer an occasional source of volatility
Conflicts between nations are now too common and fundamental to be seen as tail risks.
Recognising Change
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