Grasping the mettle of geopolitics in portfolios

Business Times

12 hours ago

[SINGAPORE] Geopolitical crises and conflicts are springing up with greater frequency; do they warrant action on your portfolio? How should you approach geopolitical risk, if at all?
US-China tensions have simmered for years, but US President Donald Trump's tariff salvos against the world have further exacerbated the strains – and not just vis-a-vis China.
Some issues may seem to have a straightforward impact on economies and markets. In a tariff-ridden world, for instance, higher-for-longer inflation seems par for the course. Some themes may jump out when war erupts such as higher oil prices and more defence spending.
But is it as simple – and reactive – as that? For institutions – and certainly global corporates – which seek to take a longer, forward-looking view, taking geopolitics into account is increasingly seen as crucial for decision-making.
A 2025 survey of chief executives by the New York Stock Exchange and Oliver Wyman Forum found that concern over geopolitical risk has surged. Almost 90 per cent of CEOs rated geopolitics, trade policies, tariffs, and industrial policy as a risk to their company, up 20 percentage points from 2024. 'The 'geopolitics-first' approach to business strategy is no longer optional; it's a prerequisite for business outperformance in a new world in which politics drives markets,' Oliver Wyman Forum noted in a paper.
JPMorganChase launched a centre for geopolitics recently to advise clients on how to anticipate and respond to the top geopolitical trends including the rise of artificial intelligence (AI). In its inaugural report, chief executive Jamie Dimon wrote that the world is at a 'hinge point' in history. 'Our greatest risk is geopolitical risk. This moment demands clarity, agility, and foresight,' he wrote.
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Geopolitics driving 'the great diversification'
Amundi, with more than 2.2 trillion euros (S$3.3 trillion) under management, hired a geopolitical strategist in 2022, said Monica Defend, head of Amundi Investment Institute, to enhance its approach to asset allocation. She spoke to The Business Times on the sidelines of Amundi's World Investment Forum in Paris.
Amundi seeks to be 'more scientific' in its approach to geopolitics, says Monica Defend, head of Amundi Investment Institute. Its Geopolitical Sentiment Tracker alerts investors to rising risks. PHOTO: AMUNDI
Defend said: 'We've experienced crisis after crisis, and the pandemic was a shock that induced a paradigm shift. We recognised that some things became national security issues when we were short of some goods, and this started the global supply chain relocation.
'The new US administration has accelerated this further. We're moving to a polarised way of arranging deals. We've been looking at the potential winners of this new trend – the emerging markets... Asia and Latin America are emerging as new routes for supply chains. This is also creating a new super trend for commodities.
'Geopolitics is exacerbating the movements, whether it's energy transition or trade agreements. We used to focus on economic stability as a component in assessing the economic backdrop of a country. But we want to be more scientific.'
Amundi's first initiative was to design a Geopolitical Sentiment Tracker to alert investors to rising risks, said Defend. 'The second thing is to see is if there is some connection between the geopolitical tracker and financial regimes. For us, the assessment of the financial regime is the first step towards asset allocation.'
Amundi developed a tool using variables relating to growth, inflation, monetary policy and financial leverage. Five financial regimes or phases – correction, contraction, recovery, late cycle and asset reflation – are found to have persisted.
'The geopolitical evidence helps us to screen asset classes, such as oil, US dollar and gold. We want to be as disciplined as we can in the way we navigate the geopolitical environment, to help us decide what asset classes we want to be on or off, and how to hedge the risk.'
The bottom line, based on a paper by Anna Rosenberg, Amundi Investment Institute's head of geopolitics, is the unfolding of what she calls 'The Great Diversification' currently underway. This is evident in a few aspects: The US dollar's share of global reserves is expected to decline from around 58 per cent currently to 55 per cent over the next decade, while the renminbi's share is likely to exceed 5 per cent. Demand for eurozone bonds is rising, and European assets are attracting more capital flows. Gold is at all-time highs.
Rosenberg wrote: 'Politics will continue to hit global investors where they are most exposed – in US assets… Winners and losers will not be clear until tariff negotiations and the re-routing process are completed, but Europe is likely to remain a net winner from US uncertainty.
'While political risks remain, Europe is growing more united, as leaders understand they are stronger together than as individual member states… There is momentum towards single and financial market integration and creating an environment that could make the euro more attractive.'
A multipolar world: negative for US dollar
Marko Papic, BCA Research's chief strategist for 'geomacro', a framework which combines geopolitics and markets, noted in a paper that global asset allocators are scrambling to incorporate geopolitics into strategic asset allocations.
But they made the mistake of treating geopolitics as 'exogenous' to the portfolio – that is, as a series of external shocks fundamentally different from the core anchors of valuation, growth and inflation. 'There is nothing exogenous about geopolitics. It is very much endogenous to the macroeconomic and financial assumptions that define the strategic asset allocation,' he wrote.
It is a mistake to take the approach of anticipating the future 'end state', he wrote, but instead, 'global allocators need to consider the transition away from American unipolarity'.
Until now, most investors have been accustomed to thinking of the world as 'unipolar' with low levels of geopolitical volatility, and where the US has served as the consumer of last resort and the magnet for capital flows. But this is ending, as evidenced in the frequency of armed conflict and rise in defence spending.
Together with BCA's global asset allocation team, the geomacro team has created an approach linking geopolitical regimes and asset prices, 'using trade and capital flows as a bridge'.
'The next five to 10 years will be a decade of transition, during which the world will see the global macro imbalances shift.'
He posits two multipolar scenarios as most likely – balanced and unbalanced – with negative implications for the US dollar. In either scenario, US assets are expected to underperform due to US dollar devaluation. Both scenarios are positive for the commodities cycle.
Asset allocation approaches
Meanwhile, the Bank of Singapore (BOS) has rolled out a 'robust optimisation' (RO) technique for strategic asset allocation, which it says is a first for an Asian private bank. The RO aims to help clients build more resilient portfolios at a time of more frequent spikes in volatility and asset correlations.
The system, said BOS, does not directly incorporate geopolitics. 'Geopolitics is very hard to quantify. But they still have real effects on the economy. Growing geo-economic fragmentation can disrupt global trade and cause supply shortages, leading to inflation and slower economic growth. We factor these in when making capital market assumptions around expected returns.'
With the RO technique, the result is a far more diversified portfolio – with lower exposure to US equities, for instance – that reduces risk and focuses on minimising the potential loss in the worst-case scenario. The approach, however, may sacrifice some market return in favour of resilience.
DBS chief investment officer Hou Wey Fook said geopolitical tensions have long-term implications for portfolios, particularly through a sustained increase in infrastructure and defence spending. The bank highlighted these in its latest market insight publication.
In its asset allocation framework, DBS assesses the impact of key macro drivers on three dimensions – fundamentals, valuation and momentum. For geopolitical risk, the 'first order impact' is short-term volatility, reflected in the momentum factor. 'The second-order effects, such as changes to earnings expectations or inflation, will be captured under fundamentals.'