Organisations need to conduct scenario planning at a sufficiently high level to build resilience in the face of rising geopolitical risk, experts say, looking at how key changes to the world order, and associated policy responses, can impact companies in their portfolio.
Geopolitics matters more today than it has for several decades, argued Benjamin Weiss, managing director, Asia-Pacific, of Veracity, in a panel discussion looking at how CIOs and portfolio managers can account for geopolitical risk in their investment decisions. “I think those [geopolitical] shifts that are happening now are more dramatic than anything we’ve seen for quite a long time.”
Speaking at Investment Magazine‘s Ficuciary Investors Symposium held in the Blue Mountains near Sydney, Weiss said investors should refrain from simply looking at the world in terms of geopolitical hotspots like China and Russia. There is also violence in Kosovo, and also debt and food crises in some emerging markets, among other issues.
Geopolitics should rather be looked at as a scenario planning exercise, looking at where things could happen, and what measures businesses can put in place to better respond. These discussions need to happen at a sufficiently high level in the organisation and involve the C-Suite, he said.
A table discussion held among participants at the event – made up mostly of global asset owners – looked at what they thought was the single greatest geopolitical issue facing Australian domiciled investors today. Participants tended to focus on US-China tensions, the impact of conflict on Australian businesses, and trade becoming a weapon.
Weiss said a key piece of scenario planning he advises is understanding how exactly companies are exposed to China, particularly with new US legislation that restricts outbound investment into certain sectors of the Chinese economy.
“So understanding where your portfolio sits, and whether you’re invested in companies that are covered under any of those rules, whether you’re invested in sectors that are going to be covered under any of those impending rules, those are some of the scenarios that you might want to unpack in the course of that,” Weiss said.
Justine O’Connell, head of portfolio construction and asset allocation at AustralianSuper, said she expects geopolitics to play a more important part in investment considerations in the coming several decades than it did in the recent past, although this may simply be a return to what is historically a more normal state of affairs.
“We’ve done increasingly a lot more work on geopolitics and how to integrate it into the portfolio,” O’Connell said, looking at issues such as Russia’s invasion of Ukraine and the implications of China-US rivalry.
The focus has been on building a framework to monitor changes that could have a material impact on global markets and act as a “cycle killer,” with implications that reach far beyond the specific area where conflict may have broken out.
This involves consulting external experts with deep knowledge and experience regarding the issues at hand, and setting up a well-resourced research team. AustralianSuper also does scenario planning involving upside and downside cases, such as a so-called “cold peace” scenario with China and whether the portfolio is well positioned for this, she said.
Geopolitical tensions are on the rise, but good companies can weather the storm, said David Gait, portfolio manager at global investment manager Stewart Investors.
Gait said bottom-up investors invest in companies, not countries, and “geopolitical tensions have always been there, always will be there.”
There are many companies in Russia and, more recently, China, where geopolitics has broken the investment case for his firm, Gait said. But geopolitical risks–such as the reduction or elimination of checks and balances–tend to build over time rather than appearing suddenly, which gives investors some time to plan and consider.
“We would probably argue, well actually, China has never really been a great investment destination,” Gait said, while noting there are companies in China with good investment prospects.
One rule of thumb is mostly avoiding what he terms the commanding heights, as they are prone to higher geopolitical risks. In China this is companies closely linked to the government such as large internet companies, and in India this is companies headquartered in Delhi.
“Particularly in Asian emerging markets, the top of the indices are where most of the geopolitical risk sits,” Gait said. “So if you’re stuck in those companies, you know you are taking on a lot of geopolitical risk.”