How can we connect geopolitical scenarios to asset allocation?

Geopolitical events are increasing in intensity and frequency, and investors are paying more attention to these risks as a result. How can institutional investors integrate geopolitical scenario analysis into their asset allocation processes?

There is an extensive landscape of geopolitical consultancies, commentators and strategists, that design intricate scenarios for how future events could play out. The hardest step however, and naturally key for investors, is to link these geopolitical scenarios to markets.

There are limited options on this front. The simplest gauge, which is also regularly used, is to look at how markets reacted over different geopolitical episodes. But what if the past doesn't repeat?

We have designed a scenario modelling platform for investors to quickly build forward-looking and tailored scenarios. Geopolitical narratives can be translated into macro drivers that propagate across asset classes and Capital Market Assumptions. This forms the basis for changing your portfolio to navigate the risks and opportunities a scenario presents. Our platform takes a step toward better defining and quantifying geopolitical scenarios in terms of their impact on asset allocation.

What's priced in?

When thinking about markets, we consistently apply a present-value approach, which we extend to scenarios. Under this approach, "market impact" is not a single number; it is the result of changes in a set of expectations and discount rates, where these changes play out over different periods of time.

That is why it always makes sense to understand what is priced into markets before trying to understand a scenario impact. In practice, this means being explicit about what the market is assuming for cash flow growth, inflation, risk premiums, real rates and related drivers — and crucially, how those expectations vary by horizon. Geopolitical events matter insofar as they change what is priced in.

A simple example illustrates why this matters. Let's say you expect inflation to follow a particular path over the next several years. If your path aligns with the market, then you essentially agree with today's market prices. If your scenario differs from what is priced in, the size and direction of adjustments in market drivers (and therefore investment performance) depend on your view versus the market pricing.

In our framework, we represent these "priced-in" expectations as term structures: curves that show, for each macro driver, what the market is implicitly expecting at the 1-year horizon, 2-year horizon, 5-year horizon, and so on. The chart below depicts expectations across horizons for different market drivers for European equities (specifically Euro Stoxx 50).

This is a useful lens when it comes to scenario analysis, including for scenarios that are geopolitical in nature. Once you start thinking in terms of changes to what's priced in, a discipline is required: you need to think through not only which drivers move, but how they move across horizons, and whether the changes are short-lived shocks, persistent shifts, or regime changes.

The benefit of doing this is coherence. Scenarios can be consistently designed, with intuitive links across drivers and markets. An analyst then has a richer set of dimensions with which to connect their geopolitical modelling to what investors care about: prices, returns, and portfolio-level outcomes.

Another important feature of our approach is that we have complete flexibility to adjust scenarios and design something that is truly forward-looking. The goal is not to "replay history" but to use history as a reference point and then adapt – for example by adding judgement from a geopolitical expert.

Where to start with geopolitics?

We have set out what is priced into markets, but now need to turn to the difficult question: how do we put a geopolitical scenario through the drivers we have set out? Broadly speaking, we need to figure out which drivers to move, and the magnitudes of their shifts at each horizon. To guide these shifts, an easy reference point is to draw from historical episodes, and apply or amend past shifts.^[1] To make this concrete, we focus on a particular geopolitical episode: the invasion of Ukraine in 2022, and explore the impact across different asset classes.

The chart below takes us back in time, to 23 February 2022, before the invasion had begun. The blue lines show market expectations across drivers and horizons on that date. The orange lines show expectations at market close on 24 February. The shifts in the curves are one way to capture how geopolitical events propagate through markets.^[2]

The impacts over the day are intuitive, by driver and by horizon.

• Cash flow expectations fell, by roughly 2 percentage points at the 1-year horizon and 1 percentage point at the 2-year horizon.
• Inflation expectations jumped, reflecting the negative implications of the invasion for energy supply in Europe. Compared to growth, the inflation impacts were longer-lasting.
• Risk premiums repriced higher, with a large increase in the pricing of equity risk at shorter horizons, accompanied by a more mild increase in premiums at long horizons as well.
• Term premiums moved in the opposite direction across maturities, capturing a flight-to-safety as investors shifted into government bonds.

Those shifts in drivers translate into asset market impacts. In this case, the change in Euro zone term structures corresponds to a -3.7% return on the Euro Stoxx 50 within our model over the day. The actual return on the index on that day was -3.9% - so our scenario model is close to the actual outcome. Crucially, the drivers in our model were available in real-time prior to the event. If you had anticipated the changes in drivers in advance, you would have had a good indication of the market impact.

The same translation of drivers to returns applies for other equity markets, sectors, and asset classes. In our modelling, the scenario impact across other markets and segments correlates well with what actually happened. This is more of an achievement than it might sound: it requires in-depth modelling of driver exposures across asset classes and segments. It also means we can regenerate Capital Market Assumptions — expected returns at any horizon — consistent with changing drivers. We will return to this in detail in a future Insights piece.

Building a forward-looking scenario

The changes in drivers over the Ukraine news provide a reference point for thinking about geopolitical impacts today. But the moment we move from a historical episode to a forward-looking scenario, a key change is that starting points are different. Put concretely, the blue lines in the charts below show what is priced in across drivers as of 27 January 2026, and the profiles naturally differ from what was priced in back in 2022.

A simple first pass is to take the similar shifts to those that occurred over the Ukraine invasion news and apply them to today's term structures – depicted in the green lines. This exercise asks: what happens if we apply the re-pricing that occurred in 2022 to today's growth and inflation expectations, real rate paths (i.e. the monetary policy response), and risk premium pricing across asset classes?

With these driver shifts, the modelled return on the Euro Stoxx is -4.3% — a bigger impact relative to the 2022 episode of -3.7%. That difference is already a lesson in why scenarios must be forward-looking.

For the same shifts in term structures, the index is falling by more today. This effect can be explained in multiple equivalent ways. 1. The valuation of the index is higher than in 2022. 2. The equity risk premiums attached to Euro Stoxx cash flows are lower than in 2022. And 3. the duration of the index is higher.

The advantage of having the driver breakdown and their mapping to asset class returns is that we are able to amend the drivers and regenerate returns. This is what we mean by having the ability to be truly forward-looking. Up to this point, the shifts we have applied to the term structures are essentially assuming that the past repeats. But now we can change these to build new scenarios.

A simple example could be that, given a range of energy supply disruptions similar to 2022, European economies would be better positioned due to strengthened and better diversified energy sources and reserves. On this basis, we could reduce the growth and inflation impacts in a forward-looking scenario, while maintaining the same risk premium impacts, and then re-calculate the impact on markets. In our illustration, halving the shifts in the growth and inflation term structures generates an impact of -2.3% on the Euro Stoxx 50.

This is just an indication of what's possible. We could also think through much longer-term scenarios, for example building a 'Lost Decade'. This would involve more meaningfully changing long-term drivers to capture persistent shocks and regime changes. Each scenario is then the basis for changing your portfolio to navigate the risks and opportunities a scenario presents.

As the geopolitical narrative becomes richer, there is naturally more art required in order to adjust driver shifts. The payoffs should be significant, however. Our framework aims to make at least some in-roads into connecting these narratives to markets to address a lack of alternatives.

What we are really providing is a disciplined translation layer:

• a set of drivers,
• their behaviour over the short- and long-term,
• and daily historical reference points against which to benchmark different scenario ideas.

This gives a foundation on which to better define and quantify scenarios, while establishing the relevance for markets and portfolios. From this point, an investor can explore alternative strategies and asset allocations based on scenarios.