Geopolitical Risk Premium to Persist, Haass Warns, Pressuring Energy and Defense Markets

Richard Haass, a former senior U.S. foreign policy advisor, has issued a stark warning about the long-term economic consequences of escalating global tensions, asserting that a 'geopolitical risk tax' will remain embedded in financial markets for the foreseeable future. His remarks underscore growing concerns that political instability, particularly in key regions, will continue to distort asset pricing and increase uncertainty across capital markets. The implications are already visible: the CBOE Volatility Index (^VIX) has averaged 23.4 since January 2024, a 60% increase compared to its pre-2023 levels. This reflects heightened investor anxiety, particularly in energy and defense sectors. Crude oil futures (CL=F) have seen a 17% year-over-year rise in volatility, with sharp spikes during regional flashpoints. Meanwhile, defense contractors like Lockheed Martin and Raytheon have seen their forward P/E ratios expand to 22.8 and 24.1, respectively, signaling investor demand for risk compensation. The sustained elevation in risk premiums is likely to dampen long-term capital investment, particularly in infrastructure and energy transition projects. Companies reliant on global supply chains, such as Apple (AAPL), face mounting costs from rerouted logistics and increased insurance premiums. AAPL’s reported supply chain hedging costs rose 14% in Q4 2025, a trend likely to continue as firms adapt to a fragmented geopolitical landscape. Market participants, including institutional investors and hedge funds, are adjusting portfolios to reflect the new risk environment. Asset allocators are increasing exposure to defensive sectors while reducing duration in fixed income. The shift suggests a structural re-pricing of risk, with implications for interest rates, equity valuations, and global trade patterns over the next five years.