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Business Times
6 days ago
- Business
- Business Times
Grasping the mettle of geopolitics in portfolios
[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. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up 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.'
Business Times
08-07-2025
- Business
- Business Times
Amundi expects retail investors to drive ‘massive' ETF growth in Asia and Europe
[PARIS] Inflows into exchange-traded funds (ETFs) are expected to 'accelerate massively' in Asia and Europe, thanks to a rising trend of younger investors who invest and trade regularly, particularly on digital platforms, said Benoit Sorel, Amundi's global head of ETFs and smart beta business. 'My personal belief is that ETF growth is at an inflection point which is accelerating more than decelerating. I have very high ambitions… And with the element of deglobalisation, there is value in being a European asset manager.' He was speaking to journalists on the sidelines of Amundi's World Investment Forum in Paris last month. Amundi last year achieved record assets under management (AUM) of about 2.2 trillion euros (S$3.4 trillion), up 10 per cent from 2023. Based on results for 2024, inflows were strong due to ETFs and Asia segments. Its ETF assets rose 30 per cent to 268 billion euros in that period, driven by record net inflows of more than 27.8 billion euros, including 10.5 billion euros in the fourth quarter alone. Sorel said rapid and 'massive' adoption of ETFs by retail investors marks a turning point for the vehicle. 'My 'guesstimate' is retail adoption is between 20 per cent and 30 per cent of flows in Europe. This was a non-existent segment five years ago.' BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up He added: 'More and more, we're seeing a new generation of investors come into the market. And I think this will happen even faster in Asia, with all the digital platforms and online brokers developing massively (there).' Rapid wealth creation in the region is also a tailwind for ETFs, as is the urgent need for retirement savings. Fannie Wurtz, Amundi's Asia chair, said wealth represents a 'US$100 trillion opportunity', and wealth levels in Asia are rising at a more rapid clip than elsewhere. 'Digital is already here. A third of savings in Asia is done through digital channels, and will continue to grow… ETF as a listed instrument is digitally compatible, and digital acceleration will help market access.' Retirement solutions On the retirement savings gap, she said: 'In Asia, we see more regulation to help the adoption of instruments to ensure the right retirement solutions, given the gaps. If we look worldwide, the proportion of people aged 65 and above is 10 per cent today; it will be 20 to 25 per cent by 2050. There will be massive savings needs.' Sorel said observers had argued that the strong take-up of ETFs last year was because the vehicle offered a convenient and easy way to participate in the US bull market. But strong inflows in Europe have continued this year despite unease over tariffs and economic growth. 'This year, we're under way to the best year ever, with 60 per cent more assets than last year. We really see this inflection as one with exponential growth... Ten years ago, ETFs were used for niche exposure. Now, ETFs and indexing are core, and even used as an active tactical bet. If you take the second week of April when markets were extremely volatile, having the right vehicle to place your order midday is really changing the game,' he said. Among Asian institutional investors, demand for ETFs which are domiciled in Europe and set up as Undertakings for the Collective Investment of Transferable Securities (Ucits) funds is also rising, he said. Compared to a US-domiciled fund, Ucits funds offer non-US investors tax advantages, including a lower withholding tax on dividends as well as tax-free income from bonds. In addition, they are not subject to American estate tax. Sorel said expansion in Asia is a priority for Amundi, likely through a direct business or joint ventures. The asset manager's AUM in Asia rose 17 per cent year on year to 469 billion euros in 2024, thanks to inflows of more than 28 billion euros. Amundi has partnered Standard Chartered Bank, which launched the CIO Signature Funds in 11 countries in Asia, the Middle East and Africa. AUM in the funds reached two billion euros last year. The funds comprise multi-asset and ETF portfolios reflecting the views of the bank's chief investment office. Amundi is also innovating to ensure its ETFs are front-of-mind for asset allocators and savers. It has, for instance, rolled out a mega-cap ETF tracking the MSCI USA Mega Cap Select Index. It has also launched an ex-mega cap USA ETF, replicating the MSCI Index of the same name, and rolled out an equal-weight S&P 500 ETF. For retirement savers in Europe, it launched multi-asset life-cycle ETFs which progressively reduce equities exposure in favour of fixed income over the long term, with a low management fee of 0.18 per cent. Deglobalisation an opportunity Sorel believes deglobalisation is an opportunity for Amundi to differentiate itself through its climate commitments, in comparison with US managers which have retreated from climate as well as environmental, social and governance investing. 'In my trip to Asia, I was surprised to find that climate is a key concern. US asset managers are not engaging in climate anymore, but it's still central to what we do,' he said. Global ETF assets rose by a record 27 per cent to reach US$14.6 trillion as at end-December 2024. A PwC survey of ETF managers and service providers found that two-thirds of respondents expect AUM in global ETFs to reach US$26 trillion by 2029, suggesting a compound annual growth rate (CAGR) of 15 per cent over the next five years. But a third of respondents were even more optimistic; they expect the AUM to more than double to US$30 trillion by 2029, a CAGR of more than 18.4 per cent. 'Alongside ETFs' trademark liquidity, transparency and affordability, the ever-increasing choice and popularity of ETF products mean that fund allocations to ETFs will continue to grow,' said PwC. The firm also said that one of the biggest drivers is the 'great wealth transfer' of some US$68 trillion from baby boomers to younger generations over the next decade. 'The popularity of ETFs among young people means that ETF managers are well-positioned to capture a sizeable share of this unfolding market. But the resulting lowering of the average age of ETF investors is accelerating a generational shift in expectations, as ETF managers compete for customers who've become accustomed to high levels of tech-enabled engagement, experience and personalisation.'
