Watch shipping and container stocks amid escalation in the Red Sea (OTCMKTS:AMKBY)

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2020 was COVID, and 2021 was the supply chain. 2022 was inflation, and 2023 was interest rates. Now, the biggest investing risk going into 2024 looks like it will be geopolitics. Traditional relationships and alliances are breaking down, and a more polarized world has given way to structural market risk. It can also be hard to plan for such wildcards, though broad hedging and defensive plays could play a key part in investing strategy for the new year.

Snapshot: One such risk is already on full display, with Iranian-backed Houthi rebels in Yemen conducting repeated drone and missile attacks on commercial vessels traversing the Red Sea. The Bab el-Mandeb Strait is a crucial shipping passage that facilitates a sixth of world trade and is important to global seaborne commodity shipments like crude oil. Insurance premiums have risen as a result, and has even prompted the world’s biggest container shipping lines to avoid the Suez Canal by diverting their cargoes toward the circuitous route around Africa. Among them are Swiss-based MSC and French CMA CGM, as well as Danish A.P. Moller-Maersk (OTCPK:AMKBY), German Hapag-Lloyd (OTCPK:HPGLY) and Hong Kong-based OOCL (OTCPK:OROVY), whose stocks have climbed 8%-17% over the past week amid rising prices.

The Houthis had originally said they would target Israeli-linked ships to show solidarity with Hamas, but that has since extended to all ships en route to Israel, and the assaults have even continued against other ships regardless of their destination. Defense Secretary Lloyd Austin is in Israel on Monday to discuss the latest developments and will likely travel to Bahrain and Qatar this week to follow up on the talks. It comes as American troops in Iraq and Syria have been targeted by Iranian-backed proxies over 90 times since mid-October, and as the U.S. enters the coming year with its smallest military force since 1940 (active-duty troops will drop to 1,284,500).

What’s on the table? American ships like the USS Carney and fellow destroyer USS Mason have been neutralizing threats in the Red Sea since the start of the Hamas-Israel war, but a larger force is now needed. The new plan appears to be an expansion of Combined Task Force 153 into a broader maritime alliance that will initially be called Operation Prosperity Guardian. The Pentagon is also deliberating whether to directly strike Houthi military targets in Yemen to protect maritime security, but until now there have been fears of potentially fueling a broader conflict against Iran and its proxies.

Wall Street Breakfast Survey: Geopolitics is shaping up to be one of the biggest investing risks going into 2024. What region of the world is likely to upend markets the most next year? Take the poll and share your thoughts about it in the comments section.

Related tickers: Danaos (NYSE:DAC), Global Ship Lease (NYSE:GSL), ZIM (NYSE:ZIM), Matson (NYSE:MATX) and Navios Maritime Partners (NYSE:NMM).