Major geopolitical events can depress global stock prices by around one percent per month. In emerging markets, the impact can be as much as 2.5 percent. That’s according to the International Monetary Fund, which warns that geopolitics has started to exert greater influence on stock markets over the past few years.
Military conflicts and trade wars, in particular, can have a long-lasting impact. International military conflicts—such as Russia’s invasion of Ukraine in 2022—have caused stock prices to fall by an average of five percent per month, the organization states in its recently published Global Financial Stability Report. This report is released twice a year, around the IMF’s Spring and Fall meetings. That figure is twice as high as the impact from other geopolitical risks.
Since the start of the Russia-Ukraine war in 2022, the severity of global flashpoints has intensified. Financial markets no longer dismiss geopolitical factors as short-lived noise. Instead, they lead to rising market volatility and increased pressure on public finances, according to the IMF’s Global Financial Stability Report.
Joyce Chang, Chair of Global Research at JP Morgan, said during an IMF webinar last week on the effects of geopolitical risk on the financial sector that there has been a shift in how markets perceive such risks. “For a long time, it was believed that geopolitics didn’t really influence market trends. Covid and the war between Russia and Ukraine have shown that some shocks are far more lasting than previously thought.”
According to the IMF, these risks are not isolated—they spread through trade and financial networks. Even if a country is not directly involved in a conflict, the consequences can still be felt, the organization states in its semiannual financial markets report.
Geopolitics hits markets in two ways
The report identifies two primary ways in which geopolitical risks lead to financial instability. First, geopolitical escalations impact the economy through trade restrictions, capital outflows, and disruptions in supply chains. Damage to infrastructure during military conflicts also leaves a lasting mark on the economy.
Second, the uncertainty caused by geopolitical tensions affects market sentiment and leads to increased risk aversion. According to the IMF, this heightens the risk of systemic stress, including forced selling and deteriorating liquidity. Financial markets are so interconnected that risks can quickly spill over, even without direct involvement.
Financial stability in Europe
Regarding the EU specifically, the IMF notes that the bloc intends to invest 800 billion euros in defense to prepare for potential Russian aggression. The European Commission’s efforts to promote a unified capital market to make investing more appealing to individuals could support that goal, according to Jeroen van Wijngaarden, director of the Dutch asset management association Dufas.
“Europeans are letting part of their savings stagnate in bank accounts. Dutch citizens alone have over 600 billion euros in total savings. Making it easier for them to invest could channel more capital into defense via the capital markets. Along with better long-term returns, people would be putting their money to work for a cause that more and more people view as important.”
Emerging markets vulnerable
The IMF urges financial institution leaders to take geopolitical risks seriously by allocating sufficient resources to identify and manage these risks. Maintaining robust capital and liquidity buffers is essential, the organization emphasizes.
“This is especially important in emerging markets, where geopolitical events often trigger stronger market reactions. These countries generally have fewer buffers and limited fiscal space, while also being the sites of the most severe geopolitical incidents.”
A new era
The global economy is entering a new era marked by tariffs and rising uncertainty, the IMF warned on Tuesday in its latest World Economic Outlook. The trade war between China and the US will leave lasting economic scars well beyond 2025.
For 2025, the IMF has revised its global growth forecast downward to 2.8 percent from 3.3 percent, though a worldwide recession is not yet on the horizon. Both China and the US are expected to lose about one percentage point in growth. The forecasts account only for the initial round of tariffs, not the more recent increases to 145 percent on Chinese goods and the Chinese countermeasure of 125 percent on US exports. These levels far exceed the 60 percent threshold that economists say severely disrupts bilateral trade.
The heightened uncertainty is curbing investment and putting pressure on stock markets. In the US, the IMF suggests that a further correction could still follow.