In a world where a tweet can move markets and conflicts can reshape entire industries overnight, geopolitics has become the invisible hand guiding investment decisions. But as the lines between politics and economics blur, we are increasingly discussing how geopolitical volatility may impact our client portfolios.
Gone are the days when investors could simply focus on balance sheets and earnings reports. Today's global marketplace is a complex web of political tensions, trade disputes, and shifting alliances. For Australian investors, understanding the impact of geopolitics on portfolios isn't just an advantage—it's a necessity.
The End of Globalization's Golden Era
For decades, investors rode the wave of increasing globalization, benefiting from efficient supply chains and expanding markets. However, recent events have signaled a shift towards what some are calling "deglobalization" or "friend-shoring."
As Ali Dibadj, CEO of Janus Henderson noted in a recent article in the Financial Times,
"Over the past 20 or 30 years, [geopolitics] has been deflationary, created lower risk and made it easier to invest. Going forward it is the complete opposite: it is probably inflationary; it is probably going to create more risk; and it is going to make it harder to invest."
This shift means investors need to reassess long-held assumptions about global trade and supply chains. Companies with significant exposure to geopolitical hotspots may face increased scrutiny and volatility.
The Rise of Political Risk in Traditionally Stable Markets
Geopolitical risk isn't just confined to emerging markets anymore. Even traditionally stable democracies are experiencing political upheaval that can impact markets. From Brexit to the rise of populism in various countries, investors need to be aware of political risks in all
In our view, most investors are used to dealing with pockets of instability and conflict, but many say the sheer number of recent shocks — even in traditionally stable democracies — and the long-term nature of conflicts represent a sea change.
For Australian investors, this means keeping an eye on political developments not just in our major trading partners like China and the US, but also in Europe and other regions that might seem removed from our immediate concerns.
The Growing Importance of Sector-Specific Geopolitical Analysis
Different sectors are impacted by geopolitical events in varying ways. For instance, the defense sector has seen increased inflows since Russia's invasion of Ukraine.
Investors poured almost $3bn into aerospace and defence-focused funds between February and April 2022, according to Morningstar Direct data. Strong inflows have continued since, in contrast to 13 consecutive months of net withdrawals in the run-up to the invasion.
This highlights the need for investors to understand not just broad geopolitical trends, but how they specifically impact different industries and sectors.
The China Factor: Balancing Opportunity and Risk
For Australian investors, China presents both significant opportunities and risks. The growing tensions between China and the West, particularly around Taiwan, have led to a surge in funds that exclude China from emerging market investments.
The number of funds offering investors a way to invest in emerging markets while excluding China has ballooned from eight at the start of 2022 to 20 today, according to Morningstar, and inflows have exploded as tensions between the US and China have worsened.
This trend underscores the need for careful consideration of China exposure in portfolios, balancing the growth potential with geopolitical risks.
The Tech Sector's Geopolitical Vulnerability
Technology companies, often seen as global entities above geopolitical concerns, are increasingly caught in the crossfire of international tensions.
When news broke of a potential Chinese government crackdown on Apple last September, its stock shed $200bn in market capitalisation in the space of two days, but it was back at a record high within two months.
This volatility highlights the need for investors to closely monitor geopolitical developments that could impact tech giants, particularly those with significant exposure to markets like China.
The Rise of "Sovereignty Funds" and Geopolitical-Focused Investments
As geopolitical tensions rise, new investment products are emerging to capitalize on these trends.
This year Tikehau Capital, the Paris-listed group that manages $48bn in assets, launched a 'European Sovereignty Fund' as a response to 'escalating geopolitical tensions and the repercussions of excessive globalisation'."
Interestingly, the key investment themes within that fund include:
Industrial Autonomy: Strengthening local value chains and fostering sustainable industrial trajectories through investments in research, innovation, and industrial alliances, such as in clean hydrogen sectors.
Digital Competitiveness: Enhancing Europe's digital prowess, particularly in semiconductors, cloud computing, and artificial intelligence.
Healthcare Autonomy: Reducing reliance on imported medicines and promoting medical innovation.
Defence: Addressing the need for increased military spending in response to the evolving geopolitical landscape.
Ecological Transition: Investing in renewable energy, circular economy infrastructures, and initiatives aimed at achieving carbon neutrality by 205
For Australian investors, this trend suggests the potential for new investment opportunities focused on geopolitical themes, such as reshoring, critical technologies, or strategic resources.
In Summary
As the investment landscape becomes increasingly intertwined with geopolitics, Australian investors must adapt their strategies to navigate this complex environment. From reassessing portfolio exposures to incorporating geopolitical analysis into investment decisions, the challenges are significant—but so are the opportunities for those who can successfully navigate this new terrain.
DISCLAIMER
Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.
This communication is based on information from sources believed to be reliable at the time of its preparation (June 2024). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.
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