Geopolitics – Feature
least, if this picture prevails. Moreover, it comes at a time when emerging market assets appear attractive for long-term inves- tors. Valuations are inexpensive, in absolute terms and relative to developed markets and particularly relative to US equities. “After a decade of underperformance, investor positioning is very light,” Irwin says. “After a difficult few years, key econo- mies in emerging markets are stabilising and should grow faster than developed markets over the next several years, and many factors should act as a medium tailwind for growth,” he says.
In addition, it will be harder for global investors to act as ‘tour- ists’ in emerging markets, Irwin says. “The regional, country and company dynamics have become more complicated and much more expertise will be required to be successful in emerging markets.” Here a granular, bottom up understanding of company funda- mentals will be critical for investment success, Irwin says. “Each company will be impacted by regulatory and geopolitical moves in a different way, and will react based on their unique competitive advantages,” he says. “Without understanding these drivers, investors will find it hard to take advantage of geopolitical trends.” Vickers notes the challenge of looking at the changing geopo- litical picture. “Everything is a possibility. Your job as an invest- ment professional is to think about all the possibilities, about the probabilities and about the magnitude. It could be high probability but low impact, so worry less about that. It could be a reasonable probability, but real high impact, so you have to think about that.”
Chinese influence
On the prospect and the damage of the bloc stand-off scenario, Vickers says it is important to separate between Russia and China, geopolitically and in investment terms. “As Russia put boots on the ground in Ukraine we asked man- agers to exit where they could. And that was quite easily done,” he says. “You start to think about China – it is 40% of the MSCI Emerging Markets index – its influence is much greater and the number of global companies involved in the country much larger. It is much more important in terms of the global econ- omy. That would be hard to unpick.”
This is a point shared by Irwin. “The rapid and nearly complete severing of Russia from the global financial system offered a glimpse of the worst-case scenario for how this new world order could evolve. However, despite Russia’s size and impor- tance in the commodity market, it was largely irrelevant to most areas of global trade.
“China and its allies are significantly more integrated into the global economy,” Irwin adds. “A similar complete break with the West would be far more destabilising and is unlikely.
Issue 117 | October 2022 | portfolio institutional | 25
The rapid and nearly complete severing of Russia from the global financial system offered a glimpse of the worst-case scenario for how this new world order could evolve.
Derrick Irwin, Allspring Global Investments
Instead, heightened competition for resources and the push for economic self-sufficiency will have implications for inves- tors. The cost of capital is likely to rise, competition for secure supplies of commodities will put a floor on their price, and trade friction will increase.” Looking beyond the range of disruption outcomes, Graham tries to put a positive slant on the narrative, highlighting that, as serious as it may be, it could lead to good outcomes. “Trying to look at things more from a glass-half-full point of view, would be that in the developed market economies the challenges that are caused by higher inflation caused by dependence – for example – on Russian gas should be a spur for innovation to facilitate moves away from these sorts of dependency, which should present opportunities for investors, as well as hopefully accelerating progress to decarbonisation.” There is though room for a big downside, returning to the example of China, especially if tensions between China and the West continue to increase. Taiwan will remain a potential flash- point for the foreseeable future. But Irwin urges caution on such an analysis, which in turn could limit a blanket bloc sce- nario. “Both sides appear to be looking for ways to ratchet down the tension, as progress on the American depository receipts delisting issue shows,” he says. “China is not Russia, and we think it will look for ways to work with the West wher- ever possible.” Hopefully such an upbeat outlook proves correct. But in this fraught geopolitical environment it would not take much for things to wrong and a disruption to take a turn for the worse.
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