Megatrends

Portfolio Implications

A New Era of Globalization | Chapter 3

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To prepare themselves for a potentially tumultuous tussle between globalization and nationalism, CIOs need to consider the various ways these tensions will ripple across their investment portfolios and create new risks and opportunities.

1. The new era of globalization is changing national winners

  • Countries that already have some manufacturing capabilities in place today are often more attractive as friend- or near-shoring candidates in the future. Investors should consider industrial real estate as well as transport and power providers in these countries.
  • Investors should consider focusing on countries with privileged access to free-trade zones such as Poland and Mexico, or countries with comparative advantages in business environment or labor cost like India or Vietnam.
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2. Energy and food present hidden import vulnerabilities for some countries

  • Investors may need to ensure their sovereign risk framework evaluates a country’s vulnerability to price shocks arising from disruptions to food or energy supply chains.
  • Current risk methodologies may not fully account for rising risks of supply chain disruptions, and investors should consider a framework to identify countries with elevated vulnerabilities to commodity price shocks.
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3. Dual-track economy may require supplementing current risk frameworks

  • Investors should consider conducting geopolitical stress-tests on their portfolios as the new era of globalization will likely lead to divergent outcomes across both sectors and countries.
  • A stress-test would enable investors to (i) understand the magnitude and breadth of their exposure to at-risk sectors and countries; (ii) assess whether they are adequately compensated for that exposure and (iii) act accordingly.
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4. In an era of volatility, investors should consider option-based portfolios

  • To counter rising geopolitical risk and the market volatility it can create, CIOs should consider additional approaches to protect their portfolios from the idiosyncratic risks around a fragmenting global economy.
  • While option-based strategies are not alpha-generating, they may offer CIOs an additional way of managing their portfolio risk.
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“To prepare for the ongoing tussle between globalization and nationalism, CIOs may need to consider the various ways these tensions are rippling across their investment portfolios and creating new risks and opportunities.”

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<p>“To prepare for the ongoing tussle between globalization and nationalism, CIOs may need to consider the various ways these tensions are rippling across their investment portfolios and creating new risks and opportunities.”</p>