Feature – Geopolitics
strengthen’ was 16% last year, but this has rapidly jumped to almost 50%. And the proportion who predicted decoupling from China would ‘greatly strengthen’ was 12% in 2022 but has since risen to 42%. These shifts are clear indications of where the global economy – with a strong reference to China – is going.
We see the trajectory of US- China relations as decidedly negative and believe it presents significant risks for
investors. Tom Donilon, Blackrock Investment Institute
New era
This is a stark assessment. And ramps up any geopolitical risk supercycle scenario to a potentially new, much higher level.
Getting colder
Unsurprisingly these risks are already rearing their head. They can be seen in the form of increasing structural headwinds, says Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management. “These risks need to be viewed against a background of a deepening cold war between China and the US,” he says.
The seeds of this are already appearing. Under the geopolitical risk supercycle scenario things are only likely to intensify. In fact, other themes connected to it could be seen as the much- debated issue of deglobalisation and arguments about the de- dollarisation to name but two, which are resulting in, or a result of, global power shifts.
It means ideas expounded by American political theorist Fran- cis Fukuyama in the 1990s, in which he stated the ‘end of his- tory’, resulting in victory for liberal democracy are speedily being put into reverse. Liberal democracy is not the victor, but potentially in retreat. A clear indication of the uncertainty wrought by the geopoliti- cal situation is evident by a 2023 political risk survey by Oxford Analytica. This showed that last year, 68% of global companies bought political risk insurance – providing cover for wars, coups, government expropriations and other risky misfor- tunes. This is up from 25% in 2019. The fear from the geopolitical picture is revealed amongst cor- porations in other ways. Compared to last year’s survey, respondents were far more likely to opine the worst-case sce- nario across geopolitical trend options.
The proportion who predicted deglobalisation would ‘greatly 24 | portfolio institutional | June 2023 | Issue 124
What this means for investors is a clear re-assessment or even reconsideration of their portfolios. “The era is coming to a close when you owned multi assets and did not get hurt,” Tom- linson says. “With the global risk situation, now it is how domestically you focus. “That shock felt in supply chains is a factor, as is ESG,” he adds. “It makes more sense to manufacture locally. It is almost like the moons are aligning for a more domestic focus.” So based on geopolitics, the environmental concerns and the overall balance of the economy in the UK, Tomlinson says this makes a strong case for domestic investments. “It is not quite levelling up, but it is thinking about how the UK evolves from here. Is it possible that we can invest in real assets that support the UK economy? Yes, absolutely,” he says. For Dan Mikulskis, partner at Lane Clark & Peacock, a consul- tancy, a revisit of asset owner allocations is much needed. “The fragmentation of the world economic system is something investors probably have to grapple with as they consider their capital allocation decisions around the world,” he says. As the big trend of the past 20 years has been asset owners diversifying portfolios out of home markets and into global markets, usually including emerging markets and especially China. “For asset owners in the UK, this has generally been a benefit in terms of returns,” Mikulskis says.
A fragmented world
A huge re-think is needed. “Investors may need to reconsider the size of these allocations in a world which is more fragmented and where economic and financial sanctions might well be used which can trap capital or cause markets to close,” Mikulskis says. “Of course, it’s also possible that markets may re-price to reflect these risks,” he adds. “And some investors might con- sider them to be a suitable reward, whereas others might con- sider them too binary a risk to run.” Tomlinson also highlights a migration from financial assets to the real economy, with more focus on green infrastructure. “Then there are exposures that can survive different future world orders: US and Europe-based global corporations as well as real assets on the ground, the more robust conservative assets,” he adds. Wei Li, global chief investment strategist at the Blackrock
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