For many years, geopolitics was treated by investors as little more than background noise. Market participants acknowledged it as a factor in news headlines, but not as something that required a fundamental shift in portfolio strategy. That assumption no longer holds. Today, geopolitics has become a central force shaping economic outcomes, corporate strategies, and asset returns. The real question for investors is not whether geopolitics matters, but how to respond.
Theoretically, geopolitics is a classic systemic risk: it is hard to diversify away the impact of a world-war, a financial crisis or a pandemic. Investors receive compensation for bearing such risks through a risk premium. Furthermore, evidence suggests that markets could recover quickly after geopolitical shocks. Studies of returns around major conflicts since World War II showed no consistent pattern: sometimes markets fell sharply, sometimes they rallied, and often the long-term impact was minimal. This gave comfort to long-term investors that “riding it out” was the best strategy.
But this time may well be different. The ongoing rivalry between the United States and China, the erosion of globalization, and the politicization of trade and capital flows suggest a structural shift rather than a temporary disturbance. Trade volumes have plateaued, foreign direct investment has declined significantly, and global supply chains – the backbone of multinational corporate earnings – are under increasing strain. These trends point to a world in which capital flows and asset valuations could be durably reshaped.
We think geopolitics has become an important issue for most clients’ portfolios. Maybe some of the recent shift in policy fades, perhaps a trade and capital war doesn’t fully develop. But what seems highly likely is that the geopolitical shifts underlying the upending of the global trading system and financial markets aren’t going away.
Two frameworks help contextualise the geopolitical shifts underway. The first is Great Power Rivalry, where the world is defined by competition between an incumbent superpower (the US) and a rising one (China). In this view, US hegemony remains intact, Europe largely aligns with the US, while Russia plays a junior role to China. The second is Great Power Collusion, in which the US gradually retreats from its role as guarantor of a rules-based order. Old alliances lose significance, spheres of influence strengthen, and Europe finds itself caught between competing powers.
Both perspectives carry profound implications. Whether the future is defined by rivalry or retreat, the result for investors is heightened uncertainty, more frequent market disruptions, and a world where assumptions about stability can no longer be taken for granted.
For investors, the coming years are likely to be marked by greater volatility, greater inflationary pressures, and a stronger need for active management. Scenario planning becomes indispensable, as does broader diversification across regions and asset classes. Geopolitical hedging through intelligent downside protection should become part of the toolkit, and US exposure deserves closer scrutiny. This does not necessarily mean selling US assets, but it does call for more deliberate management of dollar risk.
The central message is clear: geopolitics is no longer an external shock but an integral part of market dynamics. To build resilient portfolios, investors must acknowledge this reality and incorporate it directly. Old assumptions – about the stability of the US dollar or the independence of global supply chains – can no longer be taken for granted. The task is not to react to every headline, but to create robust structures that can endure in a fragmented world.