Geopolitical risk
Also written Geo-political risk
The risk that international conflicts, sanctions, trade disputes or diplomatic tensions disrupt trade, supply chains and investor confidence, causing market volatility and losses.
In plain language
Some risks start inside a company. Some start inside a country. Geopolitical risk starts between countries.
The workbook defines it as the possible effect on markets and investments of four things:
- wars and conflicts between countries;
- tension between governments;
- trade disputes;
- political unrest.
Wars, sanctions, terror attacks and poor ties between countries can all do harm. They can upset world trade and supply chains. They can shake the trust of investors. The result is that markets swing up and down more sharply.
The workbook gives two clear examples. One is a trade war between big economies that moves share prices. The other is a break in oil supply caused by tension between countries. That pushes up energy costs for firms and for people.
How it works
How it reaches a portfolio. Chapter 1 traces three channels — trade, supply chains and confidence. An Indian investor may own no foreign assets at all and still be hit, because an oil shock raises input costs for Indian companies.
Related risks the workbook keeps separate.
| Risk | Source in the workbook |
|---|---|
| Political risk (1.5.5) | Government actions, policy changes or political instability in a country: regulatory changes, taxation policies, trade restrictions, nationalisation — "and geopolitical tensions" |
| Geopolitical risk (1.5.6) | International conflicts, sanctions, terrorism, trade disputes between countries |
| Regulatory risk (1.5.7) | Changes in laws, policies or regulations, such as a sudden rise in capital gains tax |
Where else it appears. Chapter 3 lists geopolitical risks among the global economic trends analysts weigh in top-down economic analysis. Chapter 5 says commodity derivative prices are driven by supply-demand, geopolitical risks, weather and economic trends, and currency derivatives by geopolitical events among other factors.
Mitigation, per the workbook. Diversify globally, hold safe-haven assets (gold, bonds), and stay informed so the portfolio can be adjusted. Chapter 1 adds that gold, because of its global acceptability, is viewed as attractive in times of economic uncertainty and geopolitical crisis. For an Indian resident, global diversification is itself bounded by the LRS limit of USD 2,50,000 a year (Chapter 9).
A worked example
Illustrative scenario; the workbook describes the mechanism, not these numbers.
Vikram's ₹1 crore PMS portfolio is 90% Indian equities, heavy in airlines, paints and logistics, and 10% cash.
A conflict in a major oil-producing region pushes crude prices sharply higher.
| Holding | First-order effect |
|---|---|
| Airlines | Fuel is the biggest cost — margins fall |
| Paints | Crude-linked raw materials rise — margins fall |
| Logistics | Diesel costs rise — margins fall |
| Cash | Unaffected |
Nothing went wrong at any of these companies. Suppose the equity portion falls 12%: the portfolio drops from ₹1 crore to about ₹89.2 lakh.
Had the investment policy statement set exposure limits across sectors and held part of the portfolio in gold or high-quality bonds, the same event would have been partly offset. That is what the workbook means by mitigating geopolitical risk through diversification and safe-haven assets — not predicting the conflict, but not being concentrated in its path.
Why NISM asks about it
Chapter 1 (Investments), section 1.5.6, one of seven named risk types. Questions typically ask you to classify an event — a war, sanctions, a trade dispute — as geopolitical rather than political, regulatory or business risk, or to name a mitigation (global diversification, gold and bonds as safe havens). Chapter 5's descriptions of commodity and currency derivative markets reuse the term.
Common exam traps
- Geopolitical = between countries; political = within a country. The workbook's political risk list does mention geopolitical tensions, so read the event carefully: a domestic election is political, a trade war between economies is geopolitical.
- A sudden capital gains tax increase is regulatory risk, not geopolitical risk.
- Safe havens named by the workbook are gold and bonds.
- Gold is the hard-commodity example of an asset attractive during geopolitical crisis (Chapter 1, section 1.6.3).
- It can hurt investors with no foreign assets, through oil prices, supply chains and confidence.
Where this is taught
- Series XXI-B · Chapter 1: Investment Landscapeintroduced here
- Series XIX-E · Chapter 1: Investments Landscapeintroduced here
- Series XIX-D · Chapter 1: Investments Landscapeintroduced here
- Series XXI-A · Chapter 1: Investmentsintroduced here
Related terms
- Systematic riskThe part of an investment's risk that comes from economy-wide forces moving every asset at once — it cannot be diversified away, and it is the only risk the market pays you to carry.
- DiversificationSpreading an exposure across holdings that do not move together, so that total risk falls by more than total return does — minimising risk per unit of return.
- Liberalised Remittance SchemeThe RBI facility letting a resident individual remit up to USD 250,000 per financial year abroad for any permissible current or capital account transaction, including investment in offshore funds.
- Soft and hard commoditiesThe basic split of the commodity universe: softs are perishable agricultural produce that is grown, hards are natural resources that are mined or processed.
- Exchange Rate RiskThe risk that an investment’s value, measured in the home currency, changes because foreign exchange rates move. A falling rupee raises returns on foreign assets; a rising rupee cuts them.
- Regulatory RiskThe risk that laws and regulations change unfavourably — raising costs or altering competition — and hurt investment returns. The workbook treats it as a part of legal risk.
- Frontier marketsThe smallest, least developed tier of emerging markets — high political risk, illiquid and small, but potentially high return — sitting below developed and ordinary emerging markets in country-risk analysis.
- Political riskThe volatility of returns caused by the possibility of a major change in the political or economic environment of a country — the reason investors in unstable systems add a country risk premium.
- Country riskThe extra political and macroeconomic risk of investing outside an investor's home market — priced in as a country risk premium, usually higher for developing countries than developed ones.