Geopolitical Risk Assessment for Industry Groups

Geopolitical risk shows up in portfolios as sudden earnings revisions, supply chain disruptions, and multiple compression for exposed sectors. The semiconductor industry lost over $500 billion in market cap during the 2022-2023 US-China export restriction escalation. Energy stocks swung 40%+ on Russia-Ukraine developments in 2022. The practical point: you cannot evaluate sector exposure without mapping where companies source inputs, manufacture products, and generate revenue—then stress-testing those dependencies against plausible geopolitical scenarios.

Supply Chain Concentration Risk (The Hidden Vulnerability)

Modern supply chains create chokepoints where geopolitical events can halt production across entire industries.

Semiconductors: Taiwan concentration

Taiwan produces >90% of the world's most advanced chips (sub-7nm). The three largest US semiconductor customers—Apple, NVIDIA, and AMD—depend almost entirely on TSMC for leading-edge manufacturing.

The risk calculus: A Taiwan Strait crisis wouldn't just affect chip companies—it would cascade through every sector using advanced electronics: automotive (30-50% of new car value is semiconductors), medical devices, industrial automation, and consumer electronics.

Rare earths and critical minerals: China dominance

China controls 60% of rare earth mining and 90% of processing capacity. These materials are essential for:

Practical implication: In August 2023, China announced export restrictions on gallium and germanium. Affected sectors saw immediate 5-15% drawdowns before stabilizing. Companies with disclosed alternative sourcing (like some defense contractors) recovered faster.

Pharmaceutical APIs: Geographic concentration

Approximately 70-80% of active pharmaceutical ingredients (APIs) for generic drugs come from China and India. Antibiotic production is particularly concentrated, with >90% of certain compounds sourced from China.

Tariff Exposure by Sector (Quantifying Trade Risk)

Tariffs act as a margin tax on affected industries. The impact varies dramatically by sector:

High tariff exposure sectors:

The margin math:

A consumer electronics company with 25% gross margins importing $500 million in components faces:

• 25% tariff: $125 million additional cost
• Margin impact if absorbed: Gross margin drops to 16.7% (from 25%)
• Required price increase to maintain margin: +11%

Why this matters: Companies with pricing power (strong brands, limited competition) can pass tariffs through. Commodity producers and low-margin retailers absorb the hit.

Tariff scenario analysis for portfolio holdings:

For each holding with significant China exposure, estimate:

1. China-sourced inputs as % of COGS
2. Current tariff rate on those inputs
3. Scenario tariff rate (often 25-60% in escalation scenarios)
4. Gross margin impact = (China COGS %) × (tariff increase) ÷ (1 + current gross margin)

Revenue Exposure to Specific Regions

Geographic revenue concentration creates direct earnings vulnerability to regional instability.

How to find geographic revenue:

Company 10-Ks disclose geographic revenue segmentation (search "revenue by geography" or check Note 13/14 in financial statements). For S&P 500 companies, approximately 40% of revenue comes from outside the US.

High China revenue exposure examples:

Europe/Russia exposure (2022 example):

Companies with significant Russia revenue faced writedowns when sanctions forced exits:

• Carlsberg: $1.4B writedown on Russian operations
• Renault: $2.3B loss on AvtoVAZ exit
• Shell: $3.9B post-tax charge on Russian asset impairment

The practical test: For any holding with >15% revenue from a single non-US region, you should be able to articulate the scenario that disrupts that revenue and quantify the earnings impact.

Scenario Analysis Framework (How to Stress-Test Holdings)

A structured approach to geopolitical risk assessment:

Step 1: Map the exposure

For each portfolio holding, identify:

• Manufacturing locations (especially for single-source components)
• Raw material origins (critical inputs)
• Revenue geography (top 5 countries by sales)

Step 2: Define plausible scenarios

Step 3: Estimate earnings impact

For a hypothetical semiconductor equipment company:

Baseline scenario:

• Revenue: $5B
• China revenue: 30% ($1.5B)
• Operating margin: 25%
• EPS: $8.00

China export ban scenario (severe):

• China revenue loss: -$1.5B
• Revenue decline: -30%
• Operating leverage impact: Margin drops to 15% (fixed cost deleverage)
• New EPS: $3.50 (56% decline)

China tariff scenario (moderate):

• Tariff-related price increase: Lose 20% of China volume
• Revenue decline: -$300M (-6%)
• Margin impact: -2% (partial pass-through)
• New EPS: $6.80 (15% decline)

Step 4: Assign probability-weighted impact

Expected impact = Σ (scenario probability × scenario EPS impact)

Using the example above:

• Base case (50%): $8.00 × 0.50 = $4.00
• Moderate scenario (35%): $6.80 × 0.35 = $2.38
• Severe scenario (15%): $3.50 × 0.15 = $0.53
• Probability-weighted EPS: $6.91 (vs. $8.00 base)

This implies the stock should trade at a ~14% discount to peers with less geopolitical exposure, all else equal.

Sector-Specific Risk Profiles

Technology (highest exposure):

• Taiwan semiconductor dependency
• China revenue concentration (many companies 20-50%)
• Export control vulnerability (AI chips, equipment)
• Data localization requirements fragmenting cloud markets

Energy (commodity-linked geopolitical sensitivity):

• Oil price spikes from Middle East conflicts
• Russian supply disruptions (natural gas for European refiners)
• LNG shipping route vulnerabilities
• Sanctioned counterparty risks

Industrials (supply chain + end market):

• Aerospace: Defense spending tied to threat perception
• Equipment: Tariff exposure on machinery
• Transports: Trade volume sensitivity

Healthcare (regulatory + supply chain):

• API sourcing concentration (China/India)
• Drug pricing political risk (primarily domestic)
• Clinical trial disruption in conflict zones

Consumer Discretionary (manufacturing + market access):

• Apparel manufacturing concentration (Vietnam, Bangladesh, China)
• Brand reputation in geopolitically sensitive markets
• Currency volatility from EM exposure

Geopolitical Risk Monitoring Checklist

Essential (high ROI):

• Map top 5 holdings' geographic revenue (10-K disclosure)
• Identify single-source supplier dependencies in supply chain notes
• Track export control announcements (Commerce Department BIS)
• Monitor tariff news for sectors with >20% China exposure

High-impact (systematic monitoring):

• Set Google Alerts for "[company name] + China/Taiwan/tariff"
• Review quarterly earnings call transcripts for supply chain commentary
• Track geopolitical risk indices (CBOE TYVIX for flight-to-quality signals)

Optional (for concentrated sector exposure):

• Subscribe to specialized geopolitical risk services (Stratfor, Eurasia Group)
• Model scenario impacts for holdings with >5% portfolio weight
• Consider explicit hedges (puts on high-exposure sector ETFs)

Next Step (Put This Into Practice)

Audit your largest holding's geopolitical exposure this week.

How to do it:

1. Download the most recent 10-K from SEC EDGAR
2. Search for "revenue by geography" or "geographic" in the document
3. Search for "risk factors" and read the geopolitical/trade-related disclosures
4. Note any disclosed supply chain concentrations or single-source suppliers

What you'll find:

• Geographic revenue breakdown (usually a table)
• Management's own assessment of geopolitical risks (risk factors section)
• Supply chain dependencies (often in MD&A discussion)

Red flags to watch for:

• 25% revenue from any single non-US country

• Disclosed "single-source" or "limited source" suppliers for critical inputs
• Risk factor language about export controls, tariffs, or regional instability

Action: If your holding has concentrated geographic exposure, determine whether the current valuation reflects that risk. If the P/E ratio exceeds peers with less exposure, the market may be underpricing geopolitical risk—and you're taking uncompensated risk.