Macroscope | Israel-Hamas war shows limits of forecasting in an age of uncertainty

Up until the 2008 financial crisis, international investors never took seriously non-economic risks – those that are harder to quantify, such as political risk, wars and revolutions. This was because such threats were perceived to be a problem faced by unstable emerging markets.

Yet, following the outbreak of the euro-zone crisis in 2011-12, which showed how difficult it is to maintain a monetary union consisting of sovereign states with diverging economic policies, markets began to pay more attention to political risk.

The unexpected decision by Britain in June 2016 to vote to leave the European Union, followed by Donald Trump’s victory in the US presidential election five months later, showed that even the supposedly safest advanced economies can face political shocks.

What has transpired since – the first global pandemic in a century, the largest armed conflict in Europe since World War II and the cost-of-living crisis stemming from the biggest inflation shock since the 1970s – has heightened investors’ sensitivity to non-quantitative factors when assessing risks to the global economy and markets.

However, it has also become clear that investors are out of their depth when it comes to gauging non-economic threats, particularly geopolitical risk. Markets have enough problems predicting whether the United States will suffer a recession or when the Bank of Japan will begin raising interest rates, never mind determining the impact of dramatic shifts in the geopolitical landscape.