Markets are in a 'new geopolitical regime,' and the old playbook won't work, BlackRock says

• Markets have entered a "new geopolitical regime," and the old playbook no longer applies, BlackRock said.
• The fracturing global order is now a persistent structural risk for markets, strategists said in a note.

Trade wars. A pandemic. Russia invades Ukraine. Chaos grips the Middle East.

The world has faced an avalanche of crises in the past few years, and it's tipped markets into a new era, where geopolitics have become a persistent risk, according to BlackRock.

"Greater geopolitical volatility – and the rising number of violent conflicts worldwide – increase the risk of a more disorderly and less predictable path. Yet as broad stocks and other assets move on quickly from geopolitical events, we worry they may not be appreciating that we have entered a new geopolitical regime," analysts led by Wei Li said in a note on Monday. "The old playbook no longer applies, in our view."

The warning comes as the S&P 500 and Dow Jones Industrial Average have set fresh record highs, while markets grow increasingly optimistic that the US will avoid a recession in the near term.

But stocks and bonds may not be able to shrug off international flare-ups as easily as they once did.

"Geopolitical fragmentation is one of the reasons we see persistent inflation pressures – and policy rates staying above prepandemic levels," Li said.

The war-fueled inflation risks have already begun raising red flags in some corners of the market, as Red Sea attacks boost the cost of shipping, stoking goods inflation.

Bets on the Fed cutting rates in March have dropped to 40% from 75% a month ago, according to the CME FedWatch Tool. And chances of escalation in the Middle East remain high, Li added.

With increasing political angst, supply chains are becoming longer too. That's because countries like Mexico and Vietnam are acting as intermediary trading partners between different blocs of power.

Those countries would benefit from an increasingly fractured world, but are still lacking the critical infrastructure to fully reap those benefits.

Also on the burner is the US-China rift, with Taiwan remaining a "significant flashpoint," after recent elections favored the Democratic Progressive Party, which has taken a harder line against Beijing.

"We think intense, structural competition between the US and China is the new normal, especially in defense and technology," Li wrote.

The new regime will also bring more investment into sectors like tech, clean energy, defense as countries invest in their geopolitical goals, she added.