A chart is often waved in front of folks trying to make the finance crowd pay more attention to geopolitics. It shows how markets responded to major events, like 9/11 or the start of the US-China trade war (under President Trump).
There is a big spike, as investors panicked, followed by an almost immediate return to normal trading routine, which visually looks like a flatline. It is often viewed as “proof” that geopolitics has little effect on the investment world. And also that investments have some level of immunity to the world stage.
Until recently, this was true.
Because regardless of what was said, geopolitics was not the biggest factor defining investment success. Except for specific areas, like Middle Eastern commodities or African sovereign bonds, most investors had a “choice” when it came to geopolitics, whether to care about it and factor it into their investment strategy. Or outright ignore it.
In the investment world, holistic thinking about geopolitics was not required short of a historical event and, if done, was purely an intellectual experiment or the pursuit of a select few financial mavericks.
But today, geopolitics is everywhere investors look. The flareup between Israel and Iran, for example, has prompted the Bank of England to warn of an “energy shock” akin to the 1970s, when Arab states imposed an oil embargo on mainly Western nations.
In such a climate, the idea of ignoring geopolitics is insanity. And the idea of treating geopolitics as less than the biggest factor (for investment success) is dangerous.
All of this means that investors across the world must begin to rethink geopolitics from the ground up. They must begin looking at investments through a “Geopolitics First” lens, meaning geopolitics has to become the main way to assess the overall attractiveness and security of an investment.
It means that the success of investments today and tomorrow hinges on navigating the world stage.
OLD LOGIC
The “old logic” of investors has to change towards geopolitics. This logic is based on several core beliefs:
Geopolitics is a slow-moving ship, with historical and transformative events taking place only once in a generation. This gives investors plenty of time to insulate assets or push geopolitics far off in the periphery, meaning most markets operate for years without any “geopolitical interference.”
The broader macro-environment reflects geopolitics on the ground, so investors can rely on credit rating cuts or the implementation of sanctions as indicators of what markets are about to crater and change exposure.
There are enough “checks and balances” to stop geopolitical spillover, allowing one part of an investor’s portfolio to sizzle from geopolitics while the rest of the portfolio remains cool and unaffected. Basically, there is no “horizontal blowback.”
Geopolitics is purely about certain commodities (i.e. oil) or certain narrow challenges (i.e. Red Sea), while the majority of the sectors the investment world cares about are untouched by global affairs like real estate, healthcare, or agriculture.
Existing strategies to cope with geopolitics, like assessing geopolitics as purely a risk or looking at US-China as a “Cold War”, are enough to cope with geopolitical challenges facing investors
Most investors, especially larger funds, take a multi-layered approach to geopolitics. But regardless of the complexity of strategy, these are the five pillars that govern the investment world's outlook on geopolitics.
To put it shrewdly, this logic is now deeply flawed. It must be retired. This is akin to somebody’s view of AI revolving around the Netflix or Amazon algorithm, which is not only a decade-old phenomenon (at least), but leaves out 99.9% of what is happening in the AI space.
The old investor logic towards geopolitics does not reflect the current environment and what is forming on the horizon.
NEW REALITY
There are several “new realities” facing investors as the world of geopolitics goes through a metamorphosis.
These realities will test the geopolitical quotient of investors and may force a redesign in investment strategies and outlooks.
To begin with, geopolitics has entered a period of expansion. Dozens of events are taking place in a short span of time, putting investors under siege on multiple fronts.
In fact, geopolitics is disrupting everything investors care about: raw lithium being banned from export in Ghana (commodities); Taiwanese corporate management not allowed to leave China (business exposure); German real estate firms pausing new investment over “political risk” (asset slowdown); US government banning outbound investment (capital controls).
Instead of occurring once in a generation, major geopolitical events occur once a month or even more frequently. This requires investors to play catch-up and redesign their investments on the fly as “geopolitical fires” spread rapidly and unpredictably.
Alongside this, markets are diverging from the broader macro-environment.
As Israel goes after Hezbollah and Iran, Moody’s and S&P have both cut Israel’s credit rating because of the security situation. In particular, Moody’s has warned that Israel’s rating could be cut again, potentially by multiple “notches” if the situation worsens. In the near future, could Israel have a junk rating?
Except Israel is not changing course geopolitically, meaning more rating cuts are likely. More importantly, are investors truly going to significantly cut exposure in Israel or leave altogether? Unlikely.
This means investors have to decide whether to follow the macro environment (i.e., rating cuts) or keep their ear to the ground (i.e., keep investing in places like Israel). There is no longer absolute alignment between macro indicators and the events they are analyzing. And if investors shrug off things like ratings cuts in Israel, what does it mean for other markets where macro indicators are flashing red, like China or Russia?
Connected to this, investors must accept they are alone when it comes to geopolitics.
Governments are either too exhausted or too occupied to guide foreign investment the way they once could. Even arbitration needs to be rethought in light of today’s geopolitics.
Whatever strategy investors devise to navigate the global turmoil, it cannot hinge on government security or the rule of law. None of this matters anymore. The entire saga of TikTok in the US, for instance, which is likely to end in TikTok's ban, shows how helpless the Chinese government is in protecting its companies in foreign markets.
For investors, the new geopolitics means there is no help or safety net to fall back on.
For Western investors, it is not just actions in foreign lands that they have to fear. It is also what is happening at home. The US Congress is calling in several US venture capital firms that invested in China.
Policymakers are livid that US investors injected American capital into Chinese sectors like AI and chips even though Washington warned this was fueling China’s military ambitions.
Even at home, investors and governments are at odds because of the world stage.
Lastly, the outlook of investors has to be recalibrated in light of geopolitics.
Take the AI bubble. Many investors are convinced that the AI space is about to pop as dealmaking around AI begins to slow. But there is another dimension to this, which nobody is talking about. Besides China, the major AI capitals, like the US, UK, and Japan, cannot afford to have their AI sectors slow down because of what’s at stake geopolitically. AI could permanently change the military and economic balance of power in the world.
This challenges old ideas of economics, as geopolitics forces Western governments to keep the taps of capital open to their AI world. Even if the bubble pops, geopolitics could contain the fallout. Funding AI is no longer just about building a strong industry but ensuring the West calls the shots.
In this setup, geopolitics trumps economics. This changes how investors think about long-term structural changes, like a bubble forming or popping or new rules the government might impose.
This has never happened before, perhaps except during wartime, when economic expediency and risk were ignored in pursuit of victory. Does this mean investors need to put on their “war caps”?
INVESTMENT SEEKERS
As more investors shift gears and change their strategies around geopolitics, the outcome is that those seeking investment will also need to dance differently.
This could culminate in several changes that those seeking investment should prepare for.
First, even the most distant sectors from geopolitics, like real estate, could be under pressure from the world stage.
In Germany, a developer has paused certain new projects because of the volatile political situation in the country. For the real estate firm, there is no guarantee that new developments will withstand the political shocks in Germany today and tomorrow. So the flow of capital is being paused.
Those expecting investors to write cheques like before should think twice. As investors put geopolitics first, they might rethink what was once business as usual, disrupting those hungry for funds.
Second, organizations seeking new investment, from startups to multinationals, could see new investor questioning.
Is the company prepared for a China-Taiwan war? Has the organization redesigned its supply chain beyond China? What is management’s plan for an Israel-Iran flare-up? This could catch many off-guard who never thought about “marketing” their business to investors from the standpoint of geopolitical readiness.
Some organizations, however, are ahead of the curve. When Arm, the British chip firm went to IPO, multiple pages in its filing were dedicated to geopolitics. The company already knew investors would question its exposure to global affairs, especially as Arm generates almost 25% of its revenue from China.
Arm was showing investors it was ready to play geopolitics to get funds. Everyone else might soon have to do the same.
Third, like new investments, existing investments could be put under the geopolitical spotlight.
The same concerns that investors could raise before pouring money into a new project, could be raised to those managing and steering existing projects and ventures. It is not just about revenue. It is also about ideology. When the Swedish pension fund AP7, which controls 1.7 million shares of Mondelez, called for the US conglomerate to begin a study into the risks of doing business in Russia, it was a clear sign that AP7 was putting politics ahead of profits.
Such behavior could quickly become the norm, as investors require those who have taken cash to introduce new changes or conditions. Investors could unleash their own “geopolitical campaigns” attempting to mold investments a certain way so they can withstand global rivalries.
Fourth, and lastly, some investors who are aware of how dangerous and complex the world stage is becoming could increasingly turn to governments for help.
This might sound counter to the above point that investors cannot depend on government help. But there is a difference between investors making bets expecting the state to protect them if geopolitical “hanky panky” occurs and investors making bets in lockstep with the state.
The latter is a new kind of overlap between business and government.
From the US to Europe to the Middle East, it is becoming clear that governments are in the driver’s seat when it comes to behavior with the rest of the world, usurping businesses.
This could result in investors seeking new inroads with their home nations, including intelligence agencies, in a bid to circumvent future geopolitical disruptions.
ACTIONABLE TAKEAWAYS
Investors need to rethink investments around geopolitics. This is no longer a choice. Like complying with the law, putting geopolitics first is a new principle of business. This could force investors to make tough decisions and sustain losses, for instance, if they have to exit a particular mine in Africa or cut funding to a startup in China.
There is no such thing as a “safe investment” or a “safe market.” Even sectors that were previously untouched by geopolitics, from corporate real estate to fast-food franchises, are starting to see geopolitics come into the picture. Investors can no longer deal with geopolitics by finding opportunities that are outside its scope.
Winning over investors requires playing geopolitics. Those seeking investment, attempting to stand out in the eyes of investors, may need to turn to the world stage, showcasing their strategies for a range of global issues, as a way to prove to investors their money is in safe hands.
Investor activism could take a new form. While investor activism has revolved around ESG or DEI in more recent years, it could also begin to revolve around global affairs. Investors might act radically when it comes to operations in a certain market or funding from a particular entity, as their geopolitical beliefs collide with the investment reality facing them.
Geopolitical frequency is unparalleled. The rate at which geopolitical events are occurring, and that too destabilizing events, has no precedent in modern times. The entire idea that geopolitics is manageable and slow has to be put aside. Investors must realize that geopolitical activity is ticking upward, and without a strategy, they will be playing catch up indefinitely.
CONCLUSION
Investing and geopolitics have always been closely related. Except, the overpowering nature of capital and the outlook of many nations, which was purely to develop and rise up, the worlds of finance and economics often overpowered the world of geopolitics.
This meant investors could get away with ignoring geopolitics or delegating geopolitics to those teams managing the broader basket of risks like inflation. Even in more recent years, investors have approached geopolitics purely through the lens of elections or US-China. This also meant investors were able to get away with recycling concepts that do not reflect the true nature of what is happening, like “political risk.”
But today, from wars to rivalry to technology to geoeconomics, investors face a brand new world so to speak. Geopolitics is not narrow, and capital no longer trumps global politics.
While it has not been made explicit to them, investors are at a crossroads.
If they continue with their current investment strategies, they may reap huge returns and outcompete their rivals. But, on a long enough timeline, which is paradoxically quite short, investors stand to be twisted, bashed, bent, and derailed as nations swing at one another.
However, if investors change direction now, aware of the tremendous effect geopolitics is having, they may have to forfeit huge gains and returns in the foreseeable future. But in the process, they will be charting their ships away from future storms, allowing them to sail without competition as the storms envelop everybody else.
One path will make investors bleed today. Another path will make investors bleed tomorrow. All that is guaranteed is that geopolitics will cause pain, and a new strategy is the need of the hour.
What path will investors choose?
-Abishur
Want to republish this insight? Let’s talk: abishur@mrgeopolitics.com
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