One look at the headlines today and any reasonable investor might conclude that geopolitical risk is at an all-time high.

Trudeau’s resignation, allegations of election interference by China and India, conflicts in the Middle East and Ukraine, and the on again-off again threats of U.S. tariffs, reflect a global environment that seems more tenuous than ever.

In fact, government policy uncertainty in Canada has skyrocketed, according to one survey based on news reports (see chart below).

History also shows that the mere perception of an impending geopolitical shock can move markets almost as forcefully as the actual event itself.

While these issues cannot be ignored—and we are taking steps to address them—an objective perspective offers some important context.

Taking an Objective Look

Eurasia Group, which is a geopolitical risk consulting firm based in New York, says 2025 marks a turning point for the Canadian economy, as the Trump administration’s policies remove the “protective umbrella” the U.S. has provided for decades. “In 2025 it will become clear that we are in a new era of global politics: a G-Zero world in which no one power or group of powers is willing and able to drive a global agenda and maintain international order,” it shared in a January 6 report.

On the other hand, researchers at the Peterson Institute for International Economics, a think tank based in Washington DC, concluded in 2023 that, “from a purely quantitative perspective,” the current global situation is more like the 1970s or 1980s than the pre-war 1930s. Turmoil and uncertainty, to be sure. But not the beginning of worldwide destabilization.

Peterson’s conclusion is based on data from the Geopolitical Risk Index (GPR), a gauge that shows baseline geopolitical risk today is still fairly well aligned with historic norms, not skyrocketing.¹ The GPR measures risk by analyzing news reports from leading publications around the world, looking for references to keywords such as invasion, blockade, threat, and terrorist activity. The index is not infallible, but it is worth consideration.

Regardless of how and when these threats are resolved, making drastic decisions during periods of heightened volatility is rarely an appropriate or effective response for the long term.

The Potential Impact of Tariffs

Geopolitical risk is a moving target. It tends to change very quickly, which makes it difficult to gauge the precise impact. Take, for example, the effect U.S. tariffs might have on the Canadian economy. There is considerable uncertainty about what level of tariffs might be imposed and which sectors will be affected.

Canadian Policy Uncertainty, Based on News Reports, 1985-2025

For illustrative purposes only.
Source: “Measuring Economic Policy Uncertainty” by Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com.

 

However, we can say with confidence that tariffs would probably reduce demand for some items, possibly resulting in a decline of the Canadian dollar relative to its U.S. counterpart, and put upward pressure on inflation. Be prepared for price increases on everyday items.

At the same time, if GDP growth looks like it will slow down significantly, the Bank of Canada and/or local governments could step up with monetary and fiscal support in an effort to prevent a recession.

Responding Appropriately

In light of all the uncertainty, we have reduced our exposure to both Canadian and U.S. equities. We are now slightly underweight Canadian equities and maintain a slight overweight to U.S. equities. A trade war will hurt both countries, but Canada is more vulnerable given our large dependence on the U.S.. Proceeds were directed to fixed income in anticipation of a slowdown in Canada. We also increased our cash weighting to buffer the portfolio from the expected volatility in capital markets.

Our commitment to a globally diversified, balanced portfolio remains unchanged. A mix of equities and bonds across various geographies can help to mitigate the impact of localized economic shocks. Bonds, in particular, tend to provide stability during periods of heightened stock market volatility, reinforcing the importance of a well-structured investment strategy.

We will continue to monitor all of these geopolitical risks and adjust our approach as necessary, with prudence and discretion.

 

 

 

1. Geopolitical Risk Indicator “recent” measurement February 2025, available at https://www.matteoiacoviello.com/gpr.htm.