The convergence of great-power competition, conflicts in Europe and the Middle East, and major elections around the world has made geopolitics a more prominent feature in the investment outlook. In an uncertain world with heightened geopolitical risks, understanding how to navigate shocks and assemble resilient portfolios is more crucial than ever before. With the right strategies, investors can manage risk and capture emerging opportunities across asset classes and regions.
PGIM brought together experts from its affiliates to discuss the impact of policy shifts on markets and the global economy, opportunities, and challenges in emerging markets, and how the global battle for technological supremacy is contributing to data centres’ rapid growth. The following is a summary of the discussion.
- Opportunities and risks amid fragmentation: The U.S. and China are engaged in greater competition, particularly around intellectual property and technology such as semiconductors. This issue has already impacted corporate earnings, highlighting why it is important for investors to factor the U.S.-China relationship into portfolio decisions. While supply-chain risks stemming from the war in Ukraine have been managed, the situation still remains unresolved and could result in further disruptions. Geopolitical risk has always been important to EMs, but it has taken on a greater level of relevance in the current environment. The outcome of the U.S. election, and its potential impact to EM economies, will be front and centre. For example, new US tariffs could be detrimental to EMs by curbing global trade and financial flows. However, supply-chain reorientation can support growth in EMs that use the geopolitical tug-of-war to their advantage. India has emerged as one alternative for investors and trade partners seeking diversification amid increased tensions between the West and China. Vietnam has also capitalised on the rerouting of supply chains.
- Impact of policy shifts and uncertainty: Global competition has set the stage for the reemergence of industrial policy, with the U.S. and Europe employing subsidies and other incentives to support strategic domestic industries. Despite this reshoring drive, there are constraints on industrial policy, including the high costs involved, elevated debt levels globally, and a lack of skilled workers in certain markets. With these constraints in mind, policymakers will likely prioritise manufacturing and technology that is critical to national security. The realignment of supply chains will continue, but it could be more targeted going forward. Mario Draghi’s report for the European Commission laid out proposals to reinvigorate the region’s economy, but there remains debate within European governments over the right course of action. An election victory by Donald Trump could provide a catalyst for Europe to implement elements of the Draghi report if trade tensions with the U.S. escalate.
- Data centres’ role in geopolitics: Data centres have experienced significant growth, fueled by cloud computing and generative AI. Constraints on supply and strong demand have made rents attractive to investors. Amid headlines about the rise of AI, the role that data centres play in national security, energy policy and the competition over semiconductor production might be overlooked. In the U.S., there is growing interest in exploring nuclear power as one option for securing a reliable source of energy for data centres. Governments are also increasingly concerned about data security, leading to high demand in countries that were not traditionally strong markets for data centres.
- Strategies for managing risk: With the world evolving in unexpected ways, investors need to factor geopolitics and its impact on global markets into their risk management strategies. Quantitative risk models can measure potential volatility in the event that certain risks materialise. For unpredictable shocks, investors can stress-test portfolios to assess the impact—such as how a policy shift will materially affect trade. As global growth moderates and risks intensify, investors may want exposure to bonds in nations where central banks are more likely to cut interest rates. Reducing exposure to commodities may be appropriate with inflation coming under control. While a strong dollar or the interruption of trade flows tend to make it more challenging for EMs to pay back dollar-denominated debt, investors should consider that Latin American and Asian countries are diverse in their credit quality and present varying levels of risk. For some countries, such as Mexico, a strong dollar does not compromise their ability to pay down debt. Data centre strategies can benefit from geopolitical fragmentation as nations refocus on fortifying their digital infrastructure and securing the flow of critical data.
References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.
The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
For compliance use only 4009291
