How can investors adapt their portfolios to prepare for new geopolitical risks? Are markets already structurally prepared to deal with geopolitical shocks, or are they vulnerable to unforeseeable events and the vagaries of regional politics? Unsurprisingly, geopolitical risks are a top priority for investors, according to a PGIM survey. More than half of investors worldwide (56%) rate geopolitical risks as a major threat. Other risk areas are considered dangerous by fewer investors: inflation (36%), economic growth (35%), financial markets (34%) and credit (22%). Overall, 59% of all investors believe that geopolitical risks have a negative impact on long-term portfolio performance.
However, nearly half of respondents (48%) believe there are now too many geopolitical risks – elections, trade disputes, cyberattacks, war and more – to effectively manage their potential impact on a portfolio. Only 28% disagree. The uncertainty and ambiguity of the current geopolitical environment makes it a significant challenge for investors. Risks can be predictable, such as: B. the likely political changes after an election. However, when the probabilities are less clear, it becomes more difficult to develop the right investment strategy for a robust portfolio.
Russia’s attack on Ukraine in 2022 has shaken the worldview of many investors. “If that can happen, then many other things are also possible,” commented the investment director of a US pension fund. “This is the world we are facing now. The usual framework conditions and the relationships between nations have lost their validity. Of course, development is still mostly ‘normal’ and predictable, but the likelihood of dramatic structural breaks is much greater than it was a decade ago.”
Three main risks
There are three risks that are currently receiving particular attention from investors.
- At the top of the list are tensions over Taiwan and the South China Sea. 48% of investors believe this is the biggest risk to global markets over the next 24 months. A conflict in the region could disrupt supply chains for key technologies, particularly semiconductors.
- In second place is the military conflict in the Middle East, cited as the greatest risk by 27% of respondents. Such a conflict could have a significant impact on global oil markets and the global economy as a whole.
- Third, the military conflict in Ukraine remains a key risk for investors, particularly in Europe where the impact on supply chains and energy markets is more acute. The war between Russia and Ukraine worries investors more than tensions between the US and Iran. But investors in the Middle East were divided on what poses the biggest risk to global markets.
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