Mapping Geopolitical Risk Across the Value Chain

Geopolitical risks have become a growing concern for institutional investors. Trade disputes, tariffs, conflicts between countries, domestic politics and macroeconomic and monetary-policy shifts can all create uncertainty. Yet standard risk models may miss important aspects of a company's underlying economic footprint. A company's headquarters location reveals little about where it may face geopolitical risk. What matters is where it operates, where its suppliers are located and where it generates revenue. Looking at equity risk only through the lens of industry, country or style-factor exposure may not fully capture these risks.

To explore how geopolitical risk may materialize, we examined the relationship between companies' underlying geographic exposures and their equity-market performance during a selected set of geopolitical events over the past decade. We found that companies with more geographically diverse revenues, operations and suppliers were less impacted than their peers during some of the decade's most significant geopolitical events, even after controlling for traditional equity factors.

To capture geopolitical risk through value-chain structure, we developed three geodiversity exposures: one for supply-chain concentration (using MSCI Supply Chain Intelligence), one for operational concentration (using MSCI GeoSpatial Asset Intelligence) and one for revenue concentration (using MSCI Economic Exposure). Each metric measures how concentrated a company's geographic footprint is along a different dimension of its value chain.¹ In the current implementation, countries are weighted equally and country-specific risk characteristics are not incorporated.

We incorporated each of the three exposures individually into the MSCI Global Equity Model for Long Term Investors (GEMLT). We identified 48 dates between 2016 and 2026 on which at least one of the three factors showed strong explanatory power for stock returns (z-scores exceeding 3). We then examined whether geopolitical events coincided with those dates.

The dates with the strongest geodiversity-factor performance coincided with a range of geopolitical events, including the U.S. tariff announcements in April 2025, Russia's invasion of Ukraine in 2022 and the U.K.'s Brexit referendum in 2016.

Across the 48 dates in our sample, all three geodiversity factors showed explanatory power for stock returns. The relationship was asymmetric: Geographically concentrated companies tended to underperform more during periods of escalating geopolitical tension than they outperformed when tensions eased. During the 29 escalation events, mean factor returns were -12.4 basis points (bps) for supply-chain concentration, -10.5 bps for operational concentration and -13.9 bps for revenue concentration. During the 19 de-escalation events, the corresponding factor returns were +4.8 bps, +8.1 bps and +7.5 bps.

Events in the trade and tariffs category coincided with some of the strongest geodiversity-factor performance. During escalation events, average factor returns were -20.9 bps for supply-chain concentration, -13.3 bps for operational concentration and -16.9 bps for revenue concentration. During de-escalation events, the corresponding returns were +9 bps, +7 bps and +6 bps. This suggests that when tariffs are announced, companies with more concentrated suppliers, operations or customers may be more vulnerable to disruption.

The strongest relationship between geodiversity and stock performance in our sample occurred during global conflict events, including Russia's invasion of Ukraine and subsequent escalations.

Bars show mean factor returns (bps) on event dates within each category. Dark bars = escalation events; light bars = de-escalation events. We examined 48 events, including 29 escalation events and 19 de-escalation events. Factor returns were negative during escalation events and positive during de-escalation events in our sample. Universe: MSCI ACWI Index, 2016–2026. "Upstream / Supply chain": Captures the geographic concentration of a company's suppliers. During escalation events in our sample, companies with more diversified supply chains outperformed those with more concentrated supply chains. "Company / Production": Captures the geographic concentration of a company's physical assets and operations. During escalation events in our sample, companies with more diversified operations outperformed those with more concentrated operations. "Downstream / Revenue": Captures the geographic concentration of where a company generates revenue. During escalation events in our sample, companies with more diversified revenue exposure outperformed those with more concentrated revenue exposure.

This dynamic was evident following the April 2025 tariff announcements. In the two trading days after the April 3 announcement, the revenue-, operations- and supply-chain-concentration factors fell by a cumulative 95.8 bps, 61.3 bps and 63.6 bps, respectively, indicating that geographically concentrated companies underperformed their peers.

As signs of de-escalation emerged, the factors began to recover and had regained most of their losses by the end of May. The largest positive move occurred on April 24, following press reports of a phone call between the leaders of the U.S. and China, alongside additional signals of de-escalation from the U.S. administration.² Factor returns rose by 13 bps, 11 bps and 17 bps, respectively.³ The second-largest positive move occurred on May 13, when the U.S. and China agreed to roll back most tariffs and announced a 90-day truce. Factor returns rose by 14 bps, 11 bps and 10 bps, respectively.⁴

This analysis provides an initial exploration of how a company's underlying geographic footprint relates to its equity-market performance during geopolitical events. Our findings suggest that geodiversity exposures may complement traditional risk models in periods of heightened geopolitical uncertainty by capturing value-chain concentration risks that standard factor models do not directly address.

This remains a new area of research and further testing across a broader and more comprehensive set of geopolitical events is needed to assess the robustness of these relationships.

Investors seeking to better understand their geopolitical exposures may find value in mapping their portfolios across these three value-chain dimensions and monitoring how those exposures evolve as geopolitical conditions change.