Global Geopolitical Realignment Has Long-Term Investing Implications

Art by Valeria Petrone

As relationships between countries and across regions grow more fractured, investors find themselves seeking protection against geopolitical volatility. The war in Ukraine, conflict in the Middle East and tensions between the U.S. and China will have implications for investors and asset allocations, according to representatives from leading institutional investment firms.  

In a recent survey conducted by PGIM, fewer than 40% of investor respondents said their portfolios are protected against significant geopolitical events. Still, more than half of institutional investors surveyed by PGIM said that geopolitical risk is the most important risk they are looking at.  

“As I travel the world talking to our large institutional investors, their No. 1 risk is geopolitical and what it means for their portfolio construction,” said David Hunt, PGIM Inc.’s president and CEO in the survey.  

“Success in this environment will require building deep geopolitical risk expertise, multi-cycle experience in managing and mitigating downside risk, and testing investment theses under different geopolitical scenarios rather than assuming a singular world view. Humility is key, but this is why active investing is critical for withstanding potential unanticipated shocks,” says Taimur Hyat, chief operating officer at PGIM.  

 
Geopolitical Risk and Investing  

Given the uncertainties, PGIM suggests hedging geopolitical risk with real assets, like gold. If tariffs and a trade war cause an inflationary environment, the firm suggests commodities, the U.S. dollar and Swiss francs.  

“Commodities are not only something that could do well in a high-geopolitical-risk environment, but they also could benefit from higher interest rates, as well as structural forces, such as continued demand for fossil fuels through the energy transition,” said Manoj Rengarajan, a principal in and portfolio manager at PGIM Quantitative Solutions, in a report.  

According to PGIM, investors have taken large positions in cash to hedge against geopolitical volatility. In the U.S, this was more pronounced, with 41% of surveyed investors increasing their cash allocations to manage risk, as opposed to 21% of all global investors. 

“With interest rates likely to remain higher than the prior decade, there are clearly opportunities for attractive real yields in both public and private fixed income, especially given the US economy seems to be heading towards a soft landing. We also see opportunities in sectors underpinned by massive consumer demand that are less at risk to political uncertainty,” Hyat says. 

Hyat points to opportunities such as data centers, and precious minerals which have high demand across the energy value-supply chain, such as copper. In addition, Hyat says the booming global demand for liquified natural gas offers attractive opportunities.  

Schroders Capital sees 2025 as being a good year for the private markets, even with the threat of geopolitical risk.  

“Considering ongoing geopolitical tensions and the elevated risks of escalating conflicts, the role of private markets in providing portfolio resilience remains crucial,” said Nils Rode, Schroders Capital’s CIO, at a press briefing. 

Many emerging markets are set to benefit from the strategic competition between and potential decoupling of the U.S. and China, something the BlackRock Geopolitical Risk Indicator lists as risks most likely to capture market attention.  

An additional consequence of competition between the great powers, according to Invesco, has been an increase in opportunities in emerging markets for near-shoring, as geopolitical supply chain realignments have made these markets more attractive. 

Some countries that have stayed neutral in events like the war in Ukraine—such as India—have benefited, says Tina Byles Williams, the founder, CEO and CIO of Xponance Inc. Those countries’ neutrality has allowed them to receive concessions from the U.S., while maintaining good relations with Russia.’ 

“They have gotten a lot of cheap oil from Russia to help with their industrialization,” Williams says. 

Market Realities 

Some institutional investors do not see the current moment as particularly unique for markets; instead, they see the effect of current conflicts as potentially tepid. 

“While it definitely feels like we’ve been at a high level of uncertainty, if you look back over the last 30 or 40 years, we’ve always had geopolitical events, either that we were focused on or that cropped up out of nowhere,” said Ashish Shah, CIO of public investing at Goldman Sachs, in a market outlook presentation.  

In the short term, geopolitical events are virtually ignored by the market, despite some sharp corrections, says Cindy Beaulieu, the managing director and CIO of Conning North America. Markets tend to recover shortly after a major event, she says, such as when the Russia-Ukraine war began or when conflict erupted between Hamas and Israel. 

“Obviously, Russia [and] Ukraine is continuing to go on, and it had a big effect on markets when it happened briefly, and then markets look past it,” Beaulieu says. “I would say the same thing about the situation in the Middle East: Markets react a little bit, and then they look right past it. The common denominator is: There’s no multilateral involvement.”  

According to Beaulieu, with no direct U.S. involvement in events like these, U.S. markets will largely ignore them.  

Tariffs 

There are expectations, however, of potential future economic shocks, in part due to the administration of President-elect Donald Trump running the world’s largest economy. 

In a September press briefing, BNP Paribas strategists discussed the macro effects of the president-elect’s proposed tariff policy, which at the time was a 10% global tariff and a 60% China tariff. The bank had predicted, in an extreme scenario, that inflation in the U.S. would rise 4% in the first year of Trump’s second presidential term.  

Wide-ranging tariffs, however, seem unlikely, as Trump views stock market performance as a major metric of success, said Meghan Robinson, head of U.S. credit strategy at BNP Paribas, in the press briefing. 

“A lot of investors we speak to bring up the point that Trump, in the past, has been very focused on the markets and S&P as a barometer for his success and presidency,” Robinson said. “So I think if markets started to sell off, maybe he would end up implementing something less extreme, but it definitely is a key risk to inflation in markets in general.”