The chief investment strategist at $6 trillion fund giant BlackRock says Trump’s trade policy is the biggest risk to markets

The Bottom Line

• Richard Turnill, BlackRock’s chief investment strategist, notes that a measure of geopolitical risk has spiked to the highest since March 2015.
• Out of all geopolitical risks, Turnill is most worried about President Donald Trump’s trade policy, which he says could disrupt global markets.

As stocks continue their relentless pursuit of new record highs, and as the global economy grows at a steady clip, it’s easy to assume that market is free of risk.

But underneath the veneer of stability lies geopolitical uncertainty that’s recently spiked to its highest since March 2015, above even the period immediately after President Donald Trump‘s election victory, according to data from BlackRock.

The firm’s chief investment strategist, Richard Turnill, is most worried about Trump’s trade policy, he wrote in a recent blog post. More specifically, he’s concerned about a potential breakdown in North America Free Trade Agreement (NAFTA) discussions, as well as increasing tensions with China as the US reviews its practices. Any sort of a flair-up in these areas could result in a short-term pullback in emerging-market stocks, said Turnill.

“This is a risk that could shake up global growth and earnings prospects — and call into question our economic outlook,” he wrote.

If such a situation were to transpire, Turnill recommends the purchase of US Treasuries, which he notes can be an effective hedge.

But despite Turnill’s apprehension around Trump’s trade policy, he’s not necessarily expecting any sort of catastrophic market event. According to a study crunching data going back to 1962, he finds that “sudden geopolitical shocks tend to hurt global risk assets only briefly if the economy is sound.”

The chart below shows just how resilient the market has been in the face of elevated risk. The blue line — which gauges the degree of financial market concern about geopolitical risk — has spiked on multiple occasions during the 8 1/2-year stock bull market. But as the green line shows, global equities have continued steadily higher over the period.

But that’s not to say we’re completely out of the woods. Turnill finds that a “longer-lasting and more acute negative global market reaction is more likely if multiple shocks occur simultaneously or if the economy is weak.”

BlackRock Investment Institute / data from Thomson Reuters, Dow Jones